Money Matters

Two mega-growth plays: Potash and Freeport

2009-12-24T03:20:00.002-05:00

By Money Matters Editors

Two stocks to get your new investing year – 2010 – off to a good start: Potash and Freeport McMoRan.

Potash (POT). Potash remains one of the preeminent fertilizer companies in the world, producing three critical, primary plant nutrients and phosphate animal feed ingredients for both developed and developing world markets. As emerging markets develop, they need more food on a per capita basis, and that’s good news for solidly-performing fertilizer companies, such as Potash. Sell/Stop Loss for POT: $57.

Freeport McMoRan (FCX). The global recovery appears to be underway, and with it demand for key commodities, such as copper, will increase. And Freeport, the world’s second largest producer of copper, is poised to capitalize. China demand (copper pipes, electric wires), in particular, will help the copper market recover from the price bust associated with the global recession. Sell/Stop Loss for FCX: $32.

Money Matters Editors highly recommends both POT and FCX. They are, arguably, the two most promising growth plays in the U.S. equity markets.

Disclosure: No Money Matters Editor or staff member owns shares in any stock they review.

Build mega solar fields in the desert? Not so fast

2009-12-23T03:20:00.000-05:00

By Money Matters Editors

You knew solar energy could not be the no-doubt-about-it superenergy form of the 21st century – at least not at the start.

The solar panel now has a few ‘cracks’ in it, as a result of a new environmental concern about destroyed or impacted vistas – basically sight pollution, but also pollution that physically harms the environment.

U.S Sen. Dianne Feinstein’s (D-California) stated opposition to building in the Mojave Desert has effectively scuttled 13 big solar energy plants and wind projects there, The New York Times reported Tuesday.

The desert is home to countless forms of wildlife and rare species, and Feinstein does not those habitats disturbed. Her threat of legislation banning those projects was more than enough to convince developers to consider other sites.

Hence, the solar energy movement is encountering the same type of political resistance as the wind power movement has encountered: residents and environmental activists concerned about the inappropriate use of cherished land. For example, Cape Cod in Massachusetts is a strong candidate for wind mills, based on average wind speeds: it’s a horrible candidate, from an environmental standpoint, as building wind mills there would blight some of the most breath-taking vistas on the Atlantic seaboard.

Solar power is also running into the impediment of competing claims: solar power companies may see a site as ideal for collection of the sun’s energy, but another company may see the land as ideal for some other business purpose – for mining or for even for residential subdivision, etc.

For now, Sen. Feinstein wants solar power companies to concentrate on land that’s already been used – farm land for example – as sites for solar panel fields. The desert will be spared, if she has her say. And she has a lot of say.

And as much as Money Matters Editors believe U.S. solar energy must be harnessed, Sen. Feinstein has a point: we must harness the sun’s energy in the least-obtrusive, least-environmentally-blighting way possible.

OPEC is sitting pretty

2009-12-22T03:20:00.001-05:00

By Money Matters Editors

For OPEC, it’s the best of times.

OPEC, meeting in Angola, said they don’t plan to reduce production despite bountiful supplies, Bloomberg News reported Monday.

The reason? Oil prices are so advantages – oil closed Monday at $72.47 per barrel – that the group does not have to take action even though demand is modest and supplies are at 1-year and in some cases at 3-year highs in key developed world markets.

What’s keeping oil’s price so high? Well, part of it is the expectation that global economic growth – in particular, emerging market demand – will eventually place pressure on global oil supplies in a year or so. But perhaps the biggest factor in oil’s unusually high price despite sluggish demand is the weak dollar. Depending on the model one uses, the weak dollar has added $10-25 to oil’s price.

At it’s put OPEC in a nice spot. Despite sluggish demand, OPEC does not have to cut production to maintain a high price: it’s already high. Oil’s price is all the more remarkable after one considers that many group members are ‘cheating’ on their production quota – they’re pumping more than their daily quota to take advantage of oil’s high price – and the price of oil still hasn’t moved much lower.

Further, the above speaks to the U.S.’s need to cut its budget deficit – a major factor in the dollar’s slide – as soon as possible. The sooner Congress does, the sooner the U.S. and the world will recapture that extra $10-25 that’s been lost due to the cheaper buck. (For U.S. motorists, that translates into an extra 25-65 cents per gallon of gasoline – solely due to the weaker dollar: it’s not an insignificant amount of money, from a consumer spending standpoint.)

Until that time, OPEC can sit by leisurely and collect a massive amount of revenue, despite the worst global oil demand conditions in a decade. Talk about sitting pretty.

Senate Democrats hope to retain 'Sweet 60' to pass health care reform

2009-12-21T03:20:00.002-05:00

By Money Matters Editors

Senate Democrats late Sunday night were poised to begin a test vote for the health care reform bill, now that U.S. Sen. Ben Nelson, D-Nebraska, was granted certain concessions and agreed to support the bill on Saturday

If the health care reform bill passes, it would be the biggest social policy advance by the United States since the passage of Medicare in 1965, and it would rank third behind the latter and the establishment of Social Security of 1935 in terms of social safety net significance.

Among the bill’s key features, the bill would 1) prohibit discrimination by insurance companies due to medical condition/history, 2) provide substantial subsidies for those who don’t have health insurance from their employer, and 3) offer much-needed tax breaks for small businesses who do provide coverage. The bill is a major accomplishment: it’s big change and it’s big news. The bill is not perfect – no legislation is. Further, it’s a starter home not a mansion, and it will be improved in subsequent years, but one paramount fact is that about 30 million more Americans without insurance will have insurance eventually as a result of this most-needed legislation.

The bill would also cut waste and redundancy in Medicare, while broadening Medicaid eligibility to insure more poor Americans. And it would lower health insurance premium costs for the vast majority of Americans, provided the system adds the millions of healthy, generally-younger Americans who are choosing to go without insurance now. Under the new law, insurance would be required: as the pool of the insured becomes larger, health care costs would be spread out over millions and millions of more premium payers, lowering premiums for most Americans.

Of course, Money Matters Editors recommends that the Senate approve the health care reform legislation post-haste, and that the differences with the House bill be quickly reconciled in conference committee, followed by two quick House, Senate votes and President Obama’s signature. Universal health care is long overdue in the United States: every Western European economy has a national health care plan or an equivalent. And Americans have been waiting a long, long time: President Teddy Roosevelt first proposed a national health care insurance program in 1909.

Money Matter Editors thinks waiting 100 years is a long enough wait for the American people.

Health care reform: A good bill is better than none

2009-12-18T03:20:00.001-05:00

By Money Matters Editors

Health care reform update: Former President Bill Clinton, D-Arkansas, hit the nail on the head Thursday when he evaluated whether Democrats should or should not vote for a health care reform bill that does not contain a public option.

Clinton urged Democrats and others to vote for the bill: “Does this bill read exactly how I would write it? No. Does it contain everything everyone wants? Of course not," Clinton told the Agence France-Presse. “But America can't afford to let the perfect be the enemy of the good.”

As presently crafted, among other features, the bill offers subsidies for those who cannot afford to buy insurance at market rates but who do not qualify for Medicaid. The subsidized citizens would then enter “health insurance exchanges” where they presumably would get multiple bids from private insurers, encouraging competition. There would not be a public option. Liberal Democrats have called the exchanges inadequate without a public option, arguing there won’t be enough competition to lower premiums.

The bill also reduces Medicare funding by shifting to an outcomes-based approach, from a ‘testing’ approach, in which doctors are paid based on how many tests they order. Medicaid would also be expanded to cover more poor citizens who cannot afford any private sector premium.

In sum, the bill will eventually insure many more Americans than the current untenable system, which is a step forward, and that’s why Money Matters Editors supports its passage. It’s not as good as a bill with a public option, but the current bill does represent progress: it gets the nation closer to universal health care.

Job growth is the honey for voters' vinegar

2009-12-17T03:20:00.009-05:00

By Money Matters Editors

Tea Partiers. People upset at the Fed. People who want to put term limits on Congress. You name it: the United States abounds in vocal, but for the most part thinly-supported critics.

And although their complaints run the gamut of the political, social, and cultural spectrum, they all really come down to one aspect of American life: the economy. And regarding the economy, the issue of jobs is front and center.

Some critics want to replace Fed Chairman Ben Bernanke, who, by the way, was just selected Time Magazine’s “Person of the Year” for 2009. Money Matters Editors wholeheartedly agrees with the selection: it is deserved.

Other critics want to abolish the Fed. Some even want to return to the gold standard. Talk about irrational actions! Perhaps what some of the critics will advocate next is the banning of electricity and a return to the universal use of gas lamps at home and gas lanterns as street lights?

What’s the proper redress, or the proper tonic, for the above? Well, if the Obama administration doesn’t know it now – they do – it is jobs. If job growth does not appear, the rumblings will grow louder.

However, if robust job growth appears soon, and the nation’s high unemployment that has caused so much so much life disruption and social dislocation begins to decline, most of these ill-conceived, un-enlightened factions, rumblings, and fringe movements will dissipate, as they typically do in these United States.

And then the American people will resume doing what they normally do: go about living their lives.

Look for the Fed to keep rates low for a long time

2009-12-16T03:20:00.001-05:00

By Money Matters Editors

U.S. Federal Reserve Chairman Ben Bernanke is not raising short-term interest rates Wednesday, and he’s not for several quarters.

And it’s not just because the Fed needs to stimulate the U.S. economy: there’s a new fad making the rounds in Washington – it’s called ‘scapegoat the Fed.’

The fad appears every 20 years or so when lawmakers want to blame someone or something for the nation’s economic woes: why not blame the Fed.

One faction of Congress – a terribly misinformed one at that – has blamed primarily the Fed for the housing bubble, subsequent bust, and the financial crisis. The Fed and other government agencies forced banks to lend to poor/working poor people that banks would not normally lend to, and that caused mortgages to go bad – triggering the financial crisis.

The above argument strains credulity! If lending to poor people was the error, why then are commercial real estate management companies and private realty firms failing as the mortgages on their malls, shopping centers, and offices complexes fail? Did the Fed or government agencies also force banks to lend the hundreds of billions of dollars in mortgages to these commercial real estate operations? Did poor/working poor people default on these mortgages too? Hardly, which is why one shouldn’t take the faction that blames the Fed for the financial crisis too seriously.

Further, this same faction in Congress, largely conservative, wants to audit the Fed. That would substantially restrict the Fed’s independence and the amendment/bill advocating such must be voted down.

However, although, the Fed is independent, it does not operate in a political vacuum. Bernanke senses the mood on Capitol Hill and he will keep rates lower for a slightly longer time because of it. Less-certain is the impact of the political climate on quantitative easing.

But even with the polarizing, divisive mood on Capitol Hill, investors should know that Bernanke will still be guided by the metrics that matter concerning monetary policy: the unemployment rate and inflation. Provided inflation remains low, Bernanke will have the time to help the nation reduce its very high 10% unemployment by keep interest rates low through the end of 2010. If inflation accelerates, the Fed will move to increase rates sooner.

Natural gas speed-bump: hydraulic fracturing may be polluting groundwater

2009-12-10T03:20:00.000-05:00

By Money Matters Editors

Not so fast regarding shale gas or ‘unconventional gas.’ Accessing the potentially plentiful, domestic energy source has encountered a obstacle: it may be contaminating wells and groundwater, The New York Times reported.

The new techniques used to access the gas – one major techniques is called hydraulic fracturing – are causing environmental problems, The Times said. So far, the incidence of groundwater contamination is thin, but more-thorough government checks may turn up many more problems.

Natural gas companies acknowledge the validity of some concerns, The Times added, but they argue that their technology remains fundamentally safe. The U.S. Environmental Protection Agency is investigating various contaminated wells and sites.

If hydraulic fracturing is contaminating wells and groundwater, that would be a huge setback for the natural gas sector. No natural gas site is worth contaminating groundwater.

Hopefully, government regulators and industry professionals will be able to determine how to safely drill for the previously-untapped gas supplies. New natural gas drilling and related technology has the potential to create an enormous, cleaner, domestic, comparatively-cheap energy source, but no natural gas site is worth contaminating wells or other ground water supplies.

There is a large upside potential for natural gas: if proven to be safe, the aforementioned drilling techniques could increase the supply of natural gas reserves in the United States by 35% or even considerably higher. Natural gas could power fleets of buses, trucks, vans, and eventually, many cars, along with powering the nation’s electric generation plants…if it is groundwater safe. Stay tuned.

President Obama's jobs bill will jump-start hiring

2009-12-09T03:20:00.010-05:00

By Money Matters Editors

President Obama Tuesday proposed using a portion of the surplus TARP bank bailout money to fund infrastructure spending, tax credits, and related small business credits, all aimed at creating jobs, Bloomberg News reported.

We at Money Matters heartily agree. There is an enormous amount of work that needs to be done in these United States, and millions of skilled professionals and semi-skilled workers who are willing to do it: more than 7.6 million Americans have lost their jobs in the recession that started in December 2007.

Consider the following: the U.S. must rebuild its electric grid to make it fast, efficient, and capable of handling the giga-power needs of this century. Hundreds of airports need to be upgraded and improved; ditto for the nation’s rail network, including AMTRAK. Countless bridges have to be rebuilt, expanded, or maintained. Thousands of miles of highways and roads need to be repaved. Also, the hundreds of hospitals need to be upgraded, expanded and made capable of handling the needs of an aging population. And hundreds of thousands of schools and government buildings have to be modernized, made more energy-efficient, and expanded: in particular, school classrooms for science and technology must be modernized to train the engineers and scientists of the 21st century.

In sum, there is no shortage of worthy projects: if $150-175 billion in TARP funds can be allocated to begin the process of rebuilding America, that’s a sufficient start.

And, in the process, it will create millions of new, good-paying jobs – exactly what the U.S. economy needs.

Moving forward, the private sector must resume its job creation role to create a thriving U.S. economy with ample opportunities, but the Obama administration’s jobs bill can prime-the-pump, as FDR used to say.

For solid stock gains, consider Potash, Mosaic, and Agrium

2009-12-07T03:20:00.002-05:00

By Money Matters Editors

Fertilizer plays are ‘in,’ and that’s no bull.

Money Matters is Reiterating its Buy rating for Potash (POT), Mosaic (MOS), and Agrium (AGU).

All three will perform well in 2010 and 2011 as the U.S. and global economic expansions strengthen.

Of the three, Potash will likely perform the best, from a total, average annual return on equity standpoint.

Potash has the economies of scale and distribution network to take full advantage of rising demand for fertilizer in emerging markets. But really, all three warrant investor consideration: as middle classes in developing markets expand, they’ll eat richer foods - such as more red meat and chicken – and consumption per person will increase, as well. That places upward demand on food, which requires more fertilizer. It’s a long-term, secular trend that’s only been temporarily interrupted by the global recession.

Look for POT to trade above $180 in 2010; Mosaic and Agrium above $90 in 2010.

--

Disclosure: Money Matters Editors and staff do not own shares in companies they review.

Headline: ‘Cheap oil is here to stay’ – when did it arrive?

2009-12-04T03:20:00.002-05:00

By Money Matters Editors

CNNMoney.com published a story Thursday entitled “Cheap Oil Is Here To Stay.”

Question - Oil closed at about $75 per barrel Thursday: Money Matters Editors want to know, when exactly did cheap oil arrive?

The CNNMoney. com article goes on to say that a combination of conservation, increased engine efficiency, and an existing glut of oil will keep the price of oil “well below $100 a barrel.” How comforting.

Pardon us, but oil below $100 per barrel, or even trading at/near $60 is not cheap! Oil below $30 per barrel – roughly its average, real price over the past 150 years - is cheap. We’re no where near that level, and it’s hard to envision a scenario amid U.S. and global GDP growth in which prices would drop below $50 per barrel, let alone $40 or $30.

That said, any dip in oil prices should not deflect the Obama Administration and the United States from increasing federal vehicle gas mileage requirements, nor distract businesses from increasing efficiency throughout the commercial system. Simply, the surest way to reduce oil prices and the nation’s oil bill is for the U.S. to use substantially less of it, on a per person basis.

New York City is testing hybrid garbage trucks

2009-12-03T03:20:00.001-05:00

By Money Matters Editors

Sometimes the answers to difficult, complex problems stem from the least likely of places. Are economies of scale – basically the lowering of the per unit cost of a good through mass production - starting to make themselves felt in the hybrid vehicle sector?

Well, that may very well be the case, if the hybrid truck trend gains momentum, as expected. Right now, the City of New York is testing a series of hybrid garbage trucks – those big, diesel-spewing trucks that haul away garbage, lots of garbage – with the hope of lowering long-term fuel and maintenance costs, The New York Times reported.

Four hybrid-truck technologies are being tested. One type of hybrid truck the city is testing, the Mack hybrid, costs $500,000 each, or more than double the $225,000 cost of a conventional diesel garbage truck, but government grants currently cover the difference, The Times reported. Experts note that the cost of hybrid trucks would likely drop with mass purchases, and New York City would qualify as a mass purchaser: it has more than 2,000 garbage trucks. The hybrid truck needs to be refueled about once every 10 days. The conventional diesel truck? Twice a week.

Other hybrid trucks, such as diesel-hydraulic hybrids, and natural gas-hydraulic hybrids, are also being tested by various companies around the United States. If the technology and/or a refined technology can be deployed to other types of trucks, such as mid-sized trucks and long-range 18-wheelers, it’s easy to see how the technology could substantially reduce diesel consumption.

Further, New York City is a suitable testing track: it features some of the worst traffic and varying road conditions in the nation. It also is subject to four seasons of weather, all of which means that if there is weakness or flaw in each hybrid-truck’s design, New York’s roads and traffic will uncover it. Even so, subsequent truck improvements could speed the day that hybrid-vehicle technology becomes the norm on U.S. roads and highways, reducing the nation’s huge fossil fuel bill.

The EPA should ban E15

2009-12-02T04:20:00.001-05:00

By Money Matters Editors

The U.S. Environmental Protection Agency has sent the E15 proposal – gasoline with 15% ethanol – back for more study.

Money Matters Editors argues E15 from should be abandoned outright. Here’s why:

Ethanol from corn is not achieving its environmental, energy or conservation goals.

First, the scientific community is divided as to whether corn-based ethanol results in less or more greenhouse gas emissions. Some studies have shown that when one considers the energy to grow corn, harvest it, load the trucks, and process it, corn-based ethanol emits more greenhouse gases than it, in theory, would save from not drilling for oil.

Second, corn-based ethanol is causing environmental distortions. Farmers are switching from growing traditional, regionally-appropriate crops to growing – you guessed it – corn, because the profit margins are higher. That’s causing environmental degradation.

Third, diverting corn to fuel production from food is forcing up the price of food: anything that uses corn or corn syrup is going up. Livestock framers are paying considerably higher prices for feed because of the current E10: these prices would only rise under E15.

Fourth, older U.S. cars probably would not be able to burn E15 safely: E15 may cause damage to emission control systems, and gas pumps.

Finally, ethanol can be produced from other sources: it’s best to concentrate on those, rather than divert corn to fuel use.

The corn lobby is huge in Washington, and it’s going to try to intimidate the EPA to switch to E15. What should the EPA do instead to increase U.S. vehicle efficiency? Force automakers to build lighter cars. A 20% reduction in weight through use of aluminum and plastics will save more barrels of oil than E15 ever could. Ash can E15.

Good deal: U.S. Treasury borrows $44 billion for 1%

2009-12-01T03:20:00.000-05:00

By Money Matters Editors

The inflation hawks continue to circle, but for the duration of the U.S. Federal Reserve’s unprecedented quantitative easing and credit market intervention, they’ve been circling in vain.

Case in point: With more than $23 trillion pumped into the financial system via monetary and fiscal policy in the last 12 months, there’s good reason to fear a rise in inflation, particularly if the U.S. Federal Reserve’s quantitative easing is not withdrawn in time.

Further, rising inflation, in conjunction with capital from abroad would invariably lead to rising interest rates in the United States, the critics charge, but so far, higher interest rates have not manifested themselves. One example: The U.S. Treasury last week sold $44 billion in two-year notes for 0.802%, Bloomberg News reported. In other words it borrowed $44 billion for less than 1% - an astoundingly low rate. Can you believe it? $44 billion for under 1%. If only the mortgages of Money Matters’ Editors were that low! If you’re a business owner, imagine what borrowing at 1% would do for your bottom line?

What’s keeping interest rates low? There remains a great deal of demand from institutional investors (IIs) for safe investments, and U.S. Treasuries are about as safe an instrument as one can get. Also, at least a portion of these IIs belief the bull market in stocks in the U.S. and abroad this year has gotten ahead of economic fundamentals – i.e. that higher-risk investments may not generate the return many in investing circles expected. If these bearish IIs are right, and stock markets correct or tumble 20% or 30%, Treasuries will in hindsight look like a good investment.

The benefit for U.S. taxpayers? Obviously the low rates are gratifying, in that they lower the U.S. government’s financing costs for its large budget deficit and national debt. The low rates should be not serve as an excuse for Washington’s policy makers to avoid cutting the budget deficit – including passing the health care reform bill that will finally contain Medicare and Medicaid spending – but for now, policy makers can move forward knowing that the U.S. can borrow the hundreds of billions of dollars to service its debt at a reasonable rate.

Cheap gas and U.S. GDP growth: they go to together like Simon & Garfunkel

2009-11-30T03:20:00.007-05:00

By Money Matters Editors

Right now, average U.S. gasoline prices are at an inflection point: move any higher and there’s real trouble up ahead for the U.S. economy.

Conversely, a drop from current levels – about $2.63 per gallon for unleaded regular – and the U.S. economic recovery could get a tail wind.

Here’s the bleaker scenario: something happens to Americans as they see the price of gas top $3 per gallon. (It’s already above $3 for super unleaded in higher-costs areas like Los Angeles, New York, and San Francisco.) Americans cut back discretionary purchases in order to be able to fill their gas tanks with the gas they need, without breaking their budget. And that cutback in discretionary purchases shaves growth off U.S. GDP. Further, if the price remains over $3, it also convinces more Americans to choose a more fuel-efficient vehicle. And we know the impact higher gasoline and diesel prices have across the U.S. economy: it increases costs at just about every stage of production.

Here’s the brighter scenario: if oil falls from its weak-dollar-boosted level, and gasoline drops to $2.40 or $2.20 per gallon, there will be a disposable income effect. Americans will continue to make those discretionary purchases, and these transactions, combined with an improved consumer psychology that historically accompanies relatively low gas prices, will help increase U.S. GDP.

Here’s one example: As a result of having to spend $100 more per month on gasoline due to high prices, a Dad and Mom in suburban Kansas City, Missouri decide they can’t buy their daughter that new desk top computer that she needs for her sophomore year at college. Conversely, gas prices drop, and the Missouri parents make the purchase and buy the $900 computer. Now add that effect up over millions of households. You can see how energy costs affect economic growth in the United States.

So, for a clue to how the U.S. economic recovery is faring, keep an eye on gasoline prices.

Go nukes! Nuclear power gains support in U.S., abroad

2009-11-25T04:20:00.006-05:00

By Money Matters Editors

Finally, the United States appears to be heading in the correct direction, from a nuclear power for electricity standpoint.

And there’s even better news: environmentalists, in an impressive switch, are starting to side with nuclear power, too, so says The Washington Post. Here’s why:

Environmentalists now realize that nuclear power represents ‘the lesser of two evils’ versus coal-fired electric power generation plants. When faced with a choice of processing nuclear waste or seeing soot and other carbon emissions spew into the atmosphere – heating up the atmosphere to irreversible levels – the choice is clear: nuclear power wins, easy.

Now, the United States can go about the difficult task of playing ‘catch-up’ for more than two decades of nuclear power plant under-building. It’s as if the U.S. had a breakthrough technology – one that would create less of a carbon footprint and more energy independence – then threw it away for 20 years. From a public policy standpoint, the nation’s neglect of nuclear power was almost as bad as the 2001 Bush income tax cut – which turned a U.S budget surplus into a budget deficit - or going to war without implementing a draft and passing a tax increase to pay for the war.

But let’s stick to the good news at hand: the U.S. now has strong environmental / climate change reasons for vastly increasing its number of nuclear power plants. The rest of the world has already embarked on that journey: nuclear plant construction worldwide currently totals 53 – double the number of plants under construction just five years ago, The Post reported. France gets 76% of its electric power from nuclear plants; Belgium, 54%; Sweden, 42%; South Korea, 37%; Japan, 25%; the United States? Just 19.6%, but that’s going to change, in the decades ahead. To that, Money Matters Editors say, “High time!”

Memo to Congress: Pass a $200 billion jobs bill

2009-11-24T04:20:00.005-05:00

By Money Matters Editors

Memo to Congress: What would be the best Christmas/ Hannukah present for the American people? Oh, 15 million or so new jobs.

U.S. House Majority Leader Steny Hoyer, D-Maryland, said he expects the U.S. House of Representatives to vote on legislation that would create more jobs by the year-end holiday recess.

“Clearly 10.2 percent unemployment is unacceptable and is causing great pain to literally millions of people around the country.” U.S. Rep. Hoyer said, CNN reported.

To be sure, early into the globalization era, there are many problems facing the United States, but a strong argument can be made that job creation ranks at the top, above universal health care, the Iraq/Afghanistan Wars, climate change / energy policy legislation, U.S. relations with key European allies, Middle East issues, and the budget deficit.

That’s because more than 7.6 million Americans have lost their jobs in the nearly 2-year recession – which many believe ended in Q3. Still, despite the now probably-expanding economy, excess industrial capacity will likely weigh on job growth, making it harder to reduce the nation’s 10.2% unemployment rate. (Broader measures of unemployment, including one that includes part-time workers seeking full-time work and discouraged workers, are above 15%).

That means more demand has to be created, and one way to do that is a jobs bill, as Majority Leader Hoyer noted - one that increases and speed allocations for infrastructure projects and that expand tax credits that encourage companies to hire more employees.

In the best of all possible worlds, the package would be at least $200 billion in order to create as much demand as possible. The major problem with the 2009 stimulus package was that it was too small, given the depth of the recession. Even so, the stimulus is starting to take affect, from a GDP growth standpoint, in addition to saving jobs at the state level via direct aid to the states. If a $200 billion jobs bill is passed, that injection, combined with the stimulus package, should create enough demand to make the U.S. economic expansion self-sustaining. And the above is not an inconsequential issue for Congressional Democrats: as the party in power in Congress, they need to start creating jobs and reducing unemployment by June 2010, or they will face large losses in the 2010 Congressional election.

June 2010 is the cut-off period, from an electoral standpoint, to get ‘the great American job creation machine’ rolling again because, historically, voters make up their minds whom to vote for about 4-5 months before the election.

So in other words, President Obama and Congressional Democrats have about a half-year to start creating jobs or they will pay the price in many lost seats at election time.

CVS and Walgreen: A drug store dynamic duo

2009-11-23T04:20:00.000-05:00

By Money Matters Editors

You’ve heard of the Dynamic Duo – Batman and Robin. Well, consider owning shares in the Dynamic Duo of U.S. drug store chains: CVS-Caremark (CVS) and Walgreen (WAG).

Short-term, each is likely to benefit from increased store traffic, due to the H1N1 flu virus. Long-term, each is destined to increase their market share.

CVS is renowned for its highly effective new store location formula. Meanwhile, Walgreen is ‘the defensive’s defensive’ because it’s not only in a conservative sector (drug stores), it’s resisted the urge to grow by acquisition, instead focusing on the old-fashioned method of growth by opening new stores, and other methods (large penetrations into new markets, relocating stores, expanding 24-hour service to more stores).

Further, CVS and Walgreen have a demographic trend in their favor: the U.S.’s aging populace. Also, a successful effort by the U.S. Congress to pass a universal health insurance program would be a bonus: it would result in 1-3 million potential, new drug customers per year for at least 10 years.

Of the two, Walgreen, with a P/E of about 19 is pricier than CVS’s P/E of 13, but each makes a great stocking stuffer. Walgreen and CVS are stocks that you can buy 500 shares for your child’s college fund, and in 10 years, you’ll be glad you did.

--

Disclosure: No Money Matters Editor or staff member owns a position in a stock they write about.

For the good of the global economy, China must end its fixed-rate currency policy

2009-11-20T04:20:00.004-05:00

By Money Matters Editors

Memo to China: let your currency, the yuan, float, or be determined by market forces, in stages.

If you undertake the above measure, you’ll help your economy, and the global economy.

If you don’t, difficult conditions are up ahead for your economy, and the world’s, as well. Here’s why:

Keeping the yuan fixed at roughly 6.83 yuan to the U.S. dollar is only hastening the day when China will have to transition to a more domestic-consumption-based economy. That’s because China’s artificially-cheap international products that stem from that fixed-rate are increasing protectionist sentiment in the United States, a key customer nation. Conversely, allowing the yuan to appreciate, in stages, may quell protectionist sentiment that’s building in Congress, enabling China to transition to a consumer economy more gradually. Failing to do so may result in Congressional tariff on China.

Second, keeping the yuan fixed is importing inflation to China: as the dollar falls against the euro, pound etc., the yuan falls against them, as well. The fixed yuan will only hamper efforts to achieve price stability.

In the months and quarters ahead, the U.S. will do its part to support the dollar: it doesn’t want to see the yuan appreciate to 3 or 2 to the dollar. The U.S. has increased its savings rate and decreased its consumption of international goods, particularly goods from China, supporting the dollar. And in the months ahead, health care reform legislation will help cut the long-term U.S. budget deficit. Additional spending cuts and tax increases in the year ahead will cut the U.S. budget deficit further, providing more support for the dollar.

Finally, once the U.S. economic expansion is self-sustaining, the U.S. Federal Reserve will begin to raise short-term interest rates, which should boost the buck even more.

Hence, together, China and the U.S. can eliminate three structural imbalances in the world – a lack of savings and large budget deficits in the U.S. and excess capital in China, and in the process help put the global economy on a balanced, sustainable growth track. But one step must be undertaken: China must allow the yuan to float, or be determined by market forces, in stages.

Home Depot: Considerable upside exists

2009-11-19T04:20:00.005-05:00

By Money Matters Editors

The Home Depot’s (HD) Q3 earnings report is an example of what ails Wall Street right now: an expectations game that’s slightly unrealistic.

Home Deport reported Q3 EPS of 41 cents per share Tuesday, well above the First Call EPS consensus of 36 cents, and what did Wall Street do? Of course it sold the stock, with shares closing down about 30 cents to $26.99.

Home Depot even offered decent Q4 earnings guidance of 13 cents per share, compared to the First Call EPS of 16 cents. True, same store sales are decelerating, but that’s no surprise, given the housing sector’s contraction and the ‘frugal consumer’ era. In any event, the company still expects FY2009 EPS of $1.55 – in-line with the First Call FY2009 EPS estimate of $1.55.

What’s more, while a large recovery in sales is not expected in Home Depot’s key markets of California, Florida, and Arizona, those three are showing signs of stabilization. The worst is over in those markets, from a home price standpoint.

Further, slap a 20 multiple on next year’s earnings estimate of $1.69 and HD should be trading near $34. Any better-than-expected U.S. GDP performance in the quarters ahead, Q1 2010 to Q4 2010, and Home Depot’s shares will race ahead.

Perhaps the stock’s sluggishness recently has to do with short-term institutional investors (IIs) taking their profits ahead of the end of the year: HD has risen more than 55% since hitting a low around $17.50 in March.
But look on any HD pull-back as a Buy opportunity. Money Matters Editors believe HD’s shares are headed to $40 in 2010.

--

Disclosure: No Money Matters Editor or staff member owns a position in a stock they write about.

Mutual funds fees: It's time to shift to pay-for-performance

2009-11-18T04:20:00.009-05:00

By Money Matters Editors

A trading colleague known by Money Matters Editors had a phrase that he used to cite when he heard a trading idea that was curious, at best.

He would say, “That makes no sense, whatsoever.” And the idea was usually subsequently tossed in the trash can.

The same can be said about guaranteed fees in the mutual fund industry, including management fees and load fees. Note that we said mutual funds, not hedge funds. Today, we’re addressing those funds that typical Americans have invested trillions of dollars in: mutual funds.

Simply, guaranteed fees for mutual funds must stop. They’re part of a pre-financial crisis era culture that lavished large salaries and bonuses on financial professionals….for non-performance – in other words guaranteed pay. That model has been discredited and that era is over.

The new standard is pay for performance – and that’s the only fair system: if you earn a return, you’re paid. If not, you’re not. Mutual funds should only pay a modest salary to administrators: the rest should be performance-based. Further, no one would be in deprived circumstances under the new system: salaries will still be high enough to attract talent – only the excess, waste, overpayment, and absurd ‘payment for non-performance’ will be eliminated, to the benefit of shareholders. Mutual fund professionals will still earn median salaries well above what typical Americans make: what will be gone will be $1 million salaries and $2 million bonuses for a fund that earns no money two years in a row.

The above will help end the standard mutual fund sector alibi: When the fund performs well, mutual fund administrators chime, “We earned a great return this year. We did a great job.” But when the fund underperforms, administrators chime, “The market fell this year, driving the fund’s value lower.”

Guaranteed fees make no sense, whatsoever. It is pay for non-performance. Pay for performance is the fairest system: you eat what you kill.

Better late than never: In the future, in the U.S. too big to fail will be too big

2009-11-17T04:20:00.003-05:00

By Money Matters Editors

Perhaps the wind is starting to change in Washington, and logic guided by prudence is starting to prevail.

U.S. Federal Reserve Chairman Ben Bernanke, in a question and answer session after a speech before the Economic Club of New York, said Monday regulators should have the power to shrink or downsize banks that pose risk to the markets.

“The supervisors should be allowed by law to insist that the company divest itself or shrink its activities,” Bernanke said in response to a question.

And to that, Money Matters Editors say, “High time!”

Congress is considering legislation giving the federal government the power to force the break-up of a company that has become so large that its failure in bankruptcy could threaten the U.S. economy. This is legislation that should have been passed decades ago.

Somewhere on the road to efficiency, the United States fell prey to ‘the size monster’ - the notion than a bigger corporation, a bigger bank etc. is always better if the profit metrics indicate such. As it relates to banks, the theory is inherently flawed: bigger is not always better. In fact, it could be worse, particularly if an interruption in a large bank’s operation, say for example Citigroup (C), would jeopardize a substantial portion of the financial transactions in the nation. That structure makes the nation vulnerable to the bank/institution – something that on its face is absurd - and that’s pretty much what occurred during the financial crisis: the federal government, through various agencies, intervened to save both Citibank and the Bank of America (BAC) because it represented the lesser of two evils. Each bank was ‘too big to fail.’ They still are.

But in the future, provided the legislation passes, regulators will have the authority to order the break-up or divestiture if the bank’s misfires could lead to a financial calamity for the nation. In the future, too big to fail will be too big – a policy long that’s overdue, as far as the U.S. taxpayer is concerned.

Boeing, Airbus see blue skies in 2010

2009-11-16T04:20:00.002-05:00

By Money Matters Editors

Finally, some really good economic news. Airbus (EADS) and Boeing (BA) are both confirming that airlines have stopped pushing-back, or deferring deliveries of commercial airlines, Bloomberg News reported Sunday.

The significance for investors? When airlines end deferrals that means they’re confident about an upturn in air travel – something that usually heralds the start of an economic rebound.

Randy Tinseth, Boeing’s (BA) head of marketing for commercial planes, said as much.

“Next year will be a year of recovery, and in 2011 airlines will return to profitability,” Tinseth told Bloomberg News. “The last air show in 2007 was absolutely a year about orders, and this year is more about working with our customers.”

Now the bad news, at least on the U.S. side: Boeing may not be ready for the aviation rebound. The next-generation 787 Dreamliner has suffered repeated delays – the most recent of which concerns modification work to fix a design flaw. Boeing has promised a first test flight of the 787 by the end of calendar 2009. Boeing’s stock has taken a dip with nearly every delay: if the 787 does not perform well in flight tests, starting with a hoped-for first flight test in December – the stock will take another swoon, as institutional investors' patience finally ends regarding the new, but controversial composite-material 787.

Moreover, a 787 failure will not simply be a loss for Boeing – the failure would ripple through the U.S. economy, due to the many sectors that feed parts to the U.S. commercial aviation industry. The U.S.'s trade position also would be hurt: commercial airplanes are a major, value-added U.S. export. Hence, the hope is the 787 can make its first test flight in December, and is able to successfully complet its trial/test period to get the new plane to airlines around the world, when they need them most: at a time when passenger air travel is turning up. If it occurs, commercial aviation will serve as one growth engine for the U.S. economy in the years ahead, a welcome sight.

'Big bet' banking has to go

2009-11-13T04:20:00.002-05:00

By Money Matters Editors

What’s another aspect of banking that has to change? Banker attitudes toward banking.

Earlier, Money Matters wrote about how the ‘heads the banks win, tails the taxpayer pays’ philosophy has to end. That has to be accompanied by an end to another problematic industry practice: excessive risk.

Here’s how banking stands now. Banks encourage trading and loan officers to take excessive risk. For example, bank professionals will design complicated, derivative-based trading programs designed to take high risks: if the risks pay off, the bank wins and racks-up huge profits. If the derivative fails, the bank professionals are fired. Then they find another job with another bank, doing the same thing, doing the same thing, and the whole process starts over again.

In any event, there’s little incentive for taking low risks: if the bank professional devises a low-risk derivative that earns low profits, he’s going to be fired for not earning enough money for the bank. Hence, one can see why bankers, particularly those involved in trading, take high risks: that’s the industry standard.

The problem occurred when, in this decade – as the recent global financial crisis demonstrated – those high-risk bets not only jeopardized a bank unit, or a large bank,….but the U.S. and global financial systems. For a case study, see: American International Group (AIG). In theory, AIG was a large insurance company, but in practice it was the world’s largest hedge fund. As a result of AIG’s reckless, high-risk bets, the U.S. government and American taxpayers will be paying hundreds of billions of dollars to help AIG unwind positions, pay debts, and otherwise settle obligations, all with the goal of taking risk out of the system in an orderly fashion, without causing another freeze-up in credit markets and/or a U.S./global financial meltdown. Risk, that is, that AIG should not have been allowed to undertake in the first place, but was in fact, encouraged to take, due to banking’s culture.

The U.S. Congress must pass financial system reforms that prevent any bank or financial institution – if they pose a systemic risk – from establishing any position or system – short-term or long-term - that contains excessive risk, and we’ll let the new Financial System Risk Regulator determine what excessive risk constitutes.

Balancing the U.S. budget: pay up now, or pay a lot more, later

2009-11-12T04:20:00.003-05:00

By Money Matters Editors

Most Americans, perhaps even most U.S. investors, are not aware of the seriousness of the U.S. budget deficit situation.

They’ve been lulled into a sort of trance – encouraged by one political party – that a simple cut in federal spending will get the budget back in balance.

Nothing could be further from the truth. In fact, unless the conservatives want to abolish Social Security (not a politically smart move) or turn both Medicaid and Medicare entirely over to the states, no amount of nip-and-tuck spending cuts will balance the budget.

Taxes have to go up, and in particular, they have to be raised on upper-income groups. The middle and working classes will pay slightly more too, but the bulk of the tax increase has to fall on the upper income groups. The tax burden shifted from upper income citizens to middle and working class Americans via a series of tax cuts from 1981 to 2001 that substantially reduced upper income tax rates and total taxes paid by the upper tier. Most upper income Americans think they’re taxed too much already. Get real: when they see the tax increase that’s coming in the years ahead, they’ll realize then just how low their taxes have been…for decades.

The tax increase will pay for: 1) the unnecessary Bush tax cut of 2001, which turned a federal budget surplus of the President Clinton’s administration immediately into a budget deficit; 2) the defense spending for the Iraq and Afghanistan wars – both unpaid for, with a bill approaching $900 billion, not counting interest, and 3) the senior citizen prescription drug program – again passed but not paid for.

And if the U.S. does not raise taxes, along with cutting spending, to bring budget in balance, what happened then? Well, the nation may be in for a rude awakening: China, among other nations, continues to finance the U.S.’s massive deficit, but if the day ever arrives that China believes the U.S. is not serious about getting its fiscal house in order, China may start withdrawing funds – refusing to rollover its investment – and instantaneously U.S. interest rates would rocket higher – jeopardizing commercial activity in the U.S., and without question, pushing debt service payments to unprecedented levels. The U.S. would then have to pass an emergency tax increase and spending cut plan to calm what would likely be other jittery investors in U.S. debt. The nation’s credit rating would also take a hit.

Given the above, doesn’t it make sense to start raising taxes as soon as the economic recovery takes hold, so that the nation can avoid what is likely to be a fiscal crisis when China starts to balk? Quite simply, it’s a case of pay up now, or pay up a lot more, later.

It's time for two-tier banking

2009-11-11T04:00:00.004-05:00

By Money Matters Editors

U.S. Sen. Banking Committee Chairman Chris Dodd’s plan to rein-in bank executive compensation and bonuses is barely a week old and already it’s being called ineffectual.

“For the most part it’s pretty hollow, a toothless tiger,” said Paul Dorf, managing director of Compensation Resources Inc., a pay consultant based in Upper Saddle River, New Jersey, told Bloomberg News Tuesday. He added that the legislation needs more penalties if the rules aren’t followed.

Perhaps the problem is not so much Sen. Dodd’s revision but the U.S. government’s philosophical stance toward banking. The government wants to weed-out bank and financial institution practices that create incentives for risky/reckless practices that brought the financial system close to a collapse a year ago.

If the above is the goal, why not create a two-tier banking system? In the first tier would be investment banks. Investment banks can pay executives what they wish, but can not obtain FDIC insurance. Investors and depositors place money in them at their own risk. Any institutions whose potential failure would create systemic risk would be broken up and sold to other banks/companies and/or dissolved.

In the second tier would be community banks. These are small, more-traditional, conservative banking operations. They would be part of the FDIC system, and be subject to executive compensation and bonus limits. They would also pay modest interest rates on savings and checking accounts and CDs. They would also hold in inventory all mortgages and loans: selling of loans to third parties – i.e. ‘originate it, and dump the risk on someone else’ would not be permitted.

Until the United States converts to a two-tier banking system, one that makes shareholders and depositors pay the price for commercial bank recklessness, and that ceases the operation of ‘too big to fail banks,’ the markets will be held hostage by this cycle of bank recklessness, followed by bailouts, followed by talk from bank executives that ‘the next generation of bankers will not make the same mistakes as the current one,’ followed by another period of banker recklessness, and another financial crisis.

Simply, the system of ‘heads the bankers win, tails the taxpayers pay’ has to end or we’ll get more of the same, 10 years down the road if not sooner.

Under the two-tier banking system, commercial banks, of course, would be free to act recklessly: it’s just that they will have to do it on investors’ or depositors’ dimes, not the U.S. taxpayers'. And they won’t be able to grow to a size that threatens the financial system.

MM Factoid: U.S. temp hiring increased in October

2009-11-10T04:20:00.002-05:00

By Money Matters Editors

In this economy, you take the good news where you can get it, and one such ‘factoid’ of good news was buried deep in the U.S. Labor Department’s most-recent monthly report on the job market, the October report.

The good news? The hiring of temporary workers increased considerably in October to 34,000, with 44,000 temporary jobs having been added to the U.S. economy since July, according to Labor Department data.

The significance of the above is by no means inconsequential. Historically, an increase and turnaround in temp jobs usually precede increases in overall U.S employment. Basically, many corporations (although by no means all corporations) ease into the waters, slowly, if you will, by adding first temporary jobs, then formalizing those positions (and others) once it becomes clear that demand and improved commercial conditions are likely to endure.

Still, it remains to be seen whether the temp hiring indicator will serve as an accurate barometer in this, the start of the second decade of the globalization era, as it did during the 20th century. But the view from here argues that it will.

And if the increase in temporary hiring is sustained, that most likely means better days are ahead on the employment front – in other words, that the day of net, monthly job gains for the United States is getting closer and closer. And when it arrives, after nearly two years of net monthly job losses, that day will feel like the first spring day after a long, cold, snowy winter – a pleasant day for investors, businesses, and employment-seeking citizens alike.

Is oil the new gold?

2009-11-09T04:20:00.002-05:00

By Money Matters Editors

Is oil the new gold? Perhaps, or at least temporarily, institutional investors (IIs) are making it the new global reserve currency.

The reason? It’s primarily due to the weak dollar, and IIs’ concerns about further depreciation of the buck in the quarters ahead. IIs have bid-up commodities, including gold and oil, on concern the dollar will continue to weaken against the world’s other, major currencies (particularly the euro, British pound, yen, and Swiss franc) due to the large U.S. budget deficit.

But soft buck concerns are not the only reason for oil’s return to the $80-per-barrel range. IIs also are piling into oil as long-term asset play – arguing that crude will outperform certain categories of stocks (perhaps many categories), in the year ahead.

Finally, there’s also some buying of oil for ‘old fashioned’ reasons – the prospect of rising global demand as the U.S./global economic recoveries gain steam. There’s plenty of oil around now – inventories are brimming at 3-year and 5-year highs – but if giga-GDP growth returns to Asia, that could change relatively soon. Some IIs calculate that this will occur – and the current, adequate safety cushion between global oil supply and demand could dwindle quickly, perhaps in as little as 2-3 quarters.

But is the above enough to begin to think of oil as a new ‘surrogate global reserve currency’? Hardly, Money Matters argues. Oil may be a store of value, and a unit of account (sort of), but it’s hardly a medium of exchange. Here’s an example: If you’re a decision maker at a corporation, try telling a major insurance company you can pay your company’s building liability premium, but only in barrels of oil, or in NYMEX futures contracts, not in cash. See what the insurance company tells you.

Further, IIs’ decisions to buy oil may have a boomerang effect, or what economists’ call a ‘negative feedback loop.’ If IIs buy too many oil contracts and drive the price of oil back to the stratospheric levels it hit during the leveraging boom (as if $80 per barrel wasn’t high enough), those high prices will eliminate what little disposable income is left in the United States, and also choke-off the global economic recovery by increasing the cost of commercial transportation.

And if the latter occurs, IIs’ decisions to buy oil will eliminate the very conditions that accounted for much of oil’s rise from $40 per barrel last year, in the first place. Talk about self-defeating actions. Hence, the argument from Money Matters is, ‘IIs – invest in oil, but don’t push its price up too high.’

Is it time to take a sip of Starbucks stock?

2009-11-06T04:00:00.001-05:00

By Money Matters Editors

Starbucks (SBUX) posted a decent Q4 EPS result of 20 cents, compared to the First Call EPS estimate of 21 cents per share, or 24 cents excluding restructuring charges, but were the results good enough to warrant a Buy rating? In other words, is it appropriate for investors to resume taking a sip of that Starbucks’ ‘stock coffee?’

Starbucks’ Q4 revenue declined 4 percent to $2.42 billion compared to the First Call EPS estimate of $2.39 billion. For FY2009, SBUX earned 80 cents compared to the First Call estimate of 76 cents. The performance will likely please most institutional investors (IIs), who may bid-up the Starbucks’ shares on Friday.

Still, Money Matters is taking a guarded stance toward SBUX. The Seattle-based upscale coffee chain has closed hundreds of stores, and introduced an instant coffee (once viewed as heresy), but more actions are needed. Here’s why:

Starbucks same store sales fell 1% in Q4. Further, the ‘frugal consumer’ trend in the United States is not going away any time soon, and Starbucks needs to re-align its products with the new, budget-conscious U.S. citizen. Under current economic conditions, there aren’t nearly enough consumers to support a $3 latte, let alone a $3.50 or $4 latte. When Starbucks finds a way to make money from a $2 latte, Money Matters will be bullish on that menu item.

Second, Starbucks ended the current fiscal year with 11,128 stores in the U.S., 5,507 internationally; it closed a net 439 U.S. stores, and opened a net 394 abroad. That’s not a sufficient shift. It doesn’t take a rocket scientist to observe that Starbucks has too many stores in numerous, key U.S. metro areas. In the New York City metro region, it seems you can’t go more than 4 miles without running into a Starbucks. In FY2010, SBUX plans to open 100 new stores in the U.S. and open 200 in international markets. Given the dearth of consumers with adequate disposable income, a good tack for Starbucks would be to concentrate new store openings in nations that have the best prospects for sustainable GDP growth with expanding middle classes. A better tack: close even more marginally-performing U.S. stores than the current plan calls for, and shift those resources abroad.

When Starbucks returns to same store sales growth in the 3-5 percent range, then Money Matters will be bullish on the stock. For now, the rating is Don’t Buy.

- -

Disclosure: Money Matters Editors and staff do not own shares in stocks they review.

Is it o.k. to like Apple here?

2009-11-05T04:00:00.001-05:00

By Money Matters Editors

Is it o.k. to like Apple (AAPL) at these price levels? Sure. Here’s why:

Look for FY2010 revenue growth of about 12-14%, slightly higher than FY2009 results, on increasing demand for Apple’s impressive suite of products.

The iPod should remain the U.S.’s state-of-art MP3/digital media player, and will continue to drive double-digit revenue gains at Apple’s iTunes store.

Meanwhile, the iPhone will continue to be the preferred smart phone among young adults: 13 million iPhones were sold from its June 2007 introduction to September 2008. Dozens of applications are being added daily, and although it won’t threaten BlackBerry’s (RIMM) business market, the iPhone will remain the industry standard in the residential consumer market.

Overall, Apple’s margins should remain in the 20-25 percent range in the next 2-3 years.

Further, there’s ample room for market share gains in Europe (5 percent of revenue) and Japan (19 percent), and the Americas (48 percent). In other words, Apple’s global footprint is extensive (70 countries) but by no means has the company reached its market limits.

Technically, Apple’s stock chart is strong – an uptrend that rarely touches the key, 50-day moving average – an indication that institutional investors (IIs) are continuing to add to their AAPL positions. Further, Apple recently broke through psychological resistance at $200, and a recent pull-back to about $190 represents a Buy opportunity.

With a P/E of about 29, Apple is not cheap, but given the company’s growth prospects, the risk/return is tipped decidedly toward a Buy.

- -

Disclosure: Money Matters Editors and staff do not own shares in stocks they review.

Buffett's workin' on the railroad – buys Burlington North Santa Fe

2009-11-04T04:20:00.002-05:00

By Money Matters Editors

It’s November, and suddenly deals are popping up all over.

First New Britain, Conn.-based tool maker the Stanley Works (SWK) announced it would buy power tool expert Black and Decker (BDK), in an all-stock deal for $4.5 billion.

Stanley sees the deal as $1 accretive to earnings per share within three years.

Meanwhile, Black & Decker shareholders will receive a 22.1% premium to BDK’s closing price as of Friday, October 30, 2009 of $47.22, or roughly $57.65 per share.

Further, Money Matters likes Stanley Works in the 3-5 year period ahead. Stanley has a demonstrated business model, battle-tested management, and a global distribution network that rivals Procter & Gamble, (PG). Stanley shares could trade at $70 by the end of 2010, or about that level on a split-adjusted basis, if the company splits shares, which it has a history of doing.

Also, Warren Buffett’s Berkshire Hathaway (BRK.A) agreed to buy the remainder of Burlington Northern Santa Fe (BNI) that the company doesn’t already own, for $100 per share.

Buffett is obviously bullish on U.S. railroads, and Money Matters agrees: given a congested highway network – the U.S. highway system is inadequate - railroads in many cases offer a cheaper, faster transport option for freight than trucks.

In addition, as more public officials and citizens recognize the impact of burning fossils on global warming, attitudes toward the rails will become even more-favorable. Under most circumstances trains can transport goods and people for substantially less fossil fuel per pound than trucks.

The relevance for you, the investor? Obviously, if you’re an SWK or BNI shareholder, you’re in the chips. More broadly, the return of deals, albeit at a modest pace, is a sign that corporations are feeling more confident about the recovery, which is good to see.

- -

Disclosure: Money Matters Editors and staff do not own shares in stocks they review.

Is it time to test-drive Ford’s stock?

2009-11-03T04:00:00.007-05:00

By Money Matters Editors

The lowdown on Ford (F): Ford said it earned 29 cents per share in Q3, which beat the First Call EPS consensus estimate of a loss of 12 cents per share.

However, Ford said continuing revenue gains in its North American unit would be offset by an expected revenue slide in it European division.

Ford also raised its 2011 guidance from its North American operations to “solidly profitable” on a pre-tax basis, from “breakeven or better.” The change means Ford expects to meet its financial goal of registering a full-year profit in 2011. The First Call FY2009/FY2010 EPS estimates are a loss of $1.35 and a profit of 15 cents.

Ford has cut costs admirably in the past three years, reducing expenses by about $4.6 billion, including $1 billion in cost cuts in Q3. Nevertheless, Ford still has $26.9 billion in debt, with $1.6 billion maturing during the next 12 months. Ford’s shares closed Monday up 58 cents to $7.58.

Is it time to jump back into Ford’s shares? At this juncture, Money Matters Editors believe the answer is no, for 3 reasons. First, the U.S. consumer demand has not demonstrated that it has ‘legs’ i.e. that a large enough number of adults have the income to buy a new car without a federal income tax rebate.

Second, financing remains an obstacle for many Americans. The liquidity crisis is over, the credit crisis is not. Many, good-credit, potential auto buyers are choosing to postpone their purchases because financing is prohibitive: a 7 percent new car loan is inviting; 12 or 15 percent new car loan is not.

Third, Ford still has not developed that must-have vehicle that young couples crave. In other words, Ford needs to develop a stylish, efficient, durable, versatile vehicle that Americans can’t do without. Until the company does, and until the aforementioned other hurdles disappear, Ford’s shares contain too much risk for the reward.

--

Disclosure: Money Matters Editors and staff do not own shares in stocks they review.

Here we go again: $100 oil

2009-11-02T03:45:00.000-05:00

By Money Matters Editors

The U.S./global economic recoveries are underway, that we know. What economists and sector analysts don’t know is the whether this recovery has legs, i.e. whether it is sustainable.

Regarding the United States, the world’s largest economy, the upturn in U.S. manufacturing is one of four, key economic expansion/contraction indicators and the main reason most economists believe the economy is expanding.

However, the other four – sales (sluggish), incomes (stagnant), and payrolls (still declining), do not point to a recovery. If the three aforementioned don’t begin to trend higher, the sustainability of the rebound will come under serious questioning, as opposed to just muttering and ‘devil’s advocate’ critiques one hears now.

What’s another factor that could stop the recovery in its tracks? You guessed it: the price of oil. Institutional investors (IIs) have bid-up the price of oil to about $80 per barrel, partly as an asset play and partly due to fears about inflation. Oil is serving as a ‘temporary surrogate currency’ or ‘surrogate gold’ right now. But oil also is rising due to projected increasing demand in emerging markets – where the economic recovery appears to be on sounder footing. Given the latter, OPEC needs to increase production at its next meeting: if it doesn’t, $100 per barrel oil seems to be a certainty in 2010, and that would be counter-productive.

Counter-productive, because, although sky-high oil prices lead to net economic gains for oil producer states and oil companies, the impact is net negative just about every where else, from corporate revenue and GDP standpoints.

And the U.S. economy would be hit especially hard. Here’s the economic reality: every $1 per barrel rise in oil decreases U.S. GDP by $100 billion per year and every 1 cent increase in U.S. gasoline prices decreases U.S. consumer disposable income by $600 million per year.

Moreover, $100 oil prices, and the accompany $3 per gallon gasoline, would serve as a headwind on sales, incomes, and payrolls just as it appears the U.S. economy is starting to gain momentum, and those sky-high prices could trigger a double-dip recession.

Hence, OPEC’s decision is obvious enough: increase production at its next meeting in December. And don’t cop-out by claiming that high oil prices are due solely to a weak dollar and the U.S. budget and trade deficits. They play a role, but the United States will take care of its budget deficit in due course. In addition to the aforementioned factors, high oil prices are also caused by a world thinking emerging market economic growth in Asia is going to outstrip global oil supply increases. OPEC can do a lot to quell that sentiment by increasing production. If it doesn’t, and it pushes the market to the max again regarding how high a crude price the market can tolerate, there’s a 50 percent chance that inaction will push the U.S./global economies back to where no one wants them to be: in recession.

Will the U.S. economic recovery last?

2009-10-30T04:00:00.009-04:00

By Money Matters Editors

After a year of negative GDP growth, U.S. GDP growth finally returned, registering a better-than-expected 3.5 percent growth rate in Q3.

Doesn’t it seem like it’s been years since economists and analysts have talked about GDP growth? That’s because the recession actually started in December 2007 – with only a modest level of growth occurring during Q4 2007. In other words, the United States registered five consecutive quarters of sub-par growth or negative growth: that is a long time. In fact, the U.S. economy registered four straight negative growth quarters during the recession – the first time that’s occurred since the Great Depression.

Further, in the past 12 months, the economy has contracted 2.3 percent, including a 0.7 percent contraction in Q2 and a 6.4 percent plunge in Q1.

The rebound in Q3 was broad-based: government spending (including the $786 billion fiscal stimulus package), a slowdown in the reduction in business inventories, an increase in residential investment, and higher consumer spending, all contributed to the 3.5 percent gain.

Recession is not over, yet

However, don’t confuse the one-quarter GDP gain with the end of the recession. Technically, the Q3 gain in GDP does not mean the recession is over. The economy is recovering, but the National Bureau of Economic Research is the widely-accepted determiner of the economic cycle. One historical measure of the end of the recession that the NBER has used: two consecutive, positive GDP quarters.

Still, what one can say is that the U.S. economy is attempting to form a bottom. The obvious question, then, for investors is ‘where do we go from here?’

Some economists, the economic pessimists, argue that the U.S. economy will bounce-along-the-bottom, i.e. register anemic growth, or even possibly fall into a double-dip recession. These economists argue that the fiscal stimulus represents just a temporary, short-term boost to the economy, and that the factors are not in place to sustain the recovery. The U.S.'s high 9.8 percent unemployment rate will also cap demand, leading to economic stagnation.

Other economists, the optimists, argue that given the unusually large reduction in business inventories, pent-up demand in the economy (for autos, for example), an increase in exports supported by the weaker dollar, and the remaining stimulus money – most of the fiscal stimulus package still has not been spent - point to an economic recovery that will gain momentum in the quarters ahead.

Money Matters Editors tends to side with the optimists. There is reason for cautious optimism, assuming oil prices do not return to the stratosphere. If, however, already historically high $80 per barrel oil rises to $100-120, that has the potential to slow GDP growth dramatically by increasing business costs, and by eliminating consumer disposable income; sky-high oil prices will also increase inflation.

But barring another oil shock, look for the U.S. economic recovery to gain steam in the quarters ahead. However, most likely, GDP growth will not be robust. It should, however, be strong enough to end monthly job losses by mid-2010, with the economy adding jobs by Q3 2010. Sustained job growth however, will require the appearance of new sectors – new engines of growth for the U.S. economy.

The above doesn’t sound like much, but given that the U.S. and global financial systems were close to the abyss about a year ago, it’s a significant accomplishment.

Further, the sectors likely to perform well in the year ahead include technology, consumer staples, infrastructure / emerging market plays, and commodity-based plays, and in the weeks ahead Money Matters Editors will review some star performers.

Is Boeing's 787 Dreamliner a pipe dream?

2009-10-29T04:00:00.003-04:00

By Money Matters Editors

Boeing (BA) announced Wednesday that it’s chosen North Charleston, S.C. for its second plant for the next-generation 787 Dreamliner, over Seattle.

What would be even better news? Boeing announcing that the much-delayed 787 is rolling off the assembly line and is being delivered to airlines, worldwide.

To say there’s a lot riding on the 787 would be the understatement of the year.

First, this is Boeing’s first composite plane, with composite materials replacing heavier steel and aluminum components. Those lighter materials are a major reason why the 787 will be more fuel-efficient than comparable commercial jets.

However, the plane’s new type of construction, combined with a questionable, untested, out-sourced manufacturing process, have led to repeated delivery delays that have set the delivery date back 30 months. Boeing has booked more than 840 orders for the 787, but there is concern that major airlines will start to cancel/defer orders in favor of alternate planes, if it can’t make a first flight deadline by year’s end, and the start of deliveries by Q4 2010.

Not surprisingly, Wall Street has given Boeing’s shares a hair-cut: shares are down to about $47 from a high of $55 earlier in 2009, and near $70 about a year ago. The fact that institutional investors are exiting Boeing’s shares is a sign that Wall Street is losing confidence in the 787 project, and in the company’s management.

Second, Boeing is a major exporter for the United States: in other words, Boeing helps lower the U.S.’s trade deficit. The U.S. can not afford to have one of its primary value-added sectors go into the ditch. The U.S. needs all of its value-added sectors humming and creating jobs to eliminate the trade deficit and to increase GDP.

Will Boeing deliver a safe, reliable, efficient, 787 by the stated time-table of Q4 2010? Money Matters Editors hope so. If not, or if there are any more delays in the 787 program, one thing will be certain: CEO Jim McNerney and his management team will have to be removed.

Memo to emerging markets: Buy, consume, spend

2009-10-28T04:00:00.005-04:00

By Money Matters Editors

One of the major problems in our current economic age concerns consumers. Or, rather, the lack of consumers.

The U.S. consumer has adopted a ‘frugal consumer’ stance, and it's not going to be a short-term trend. After more than a decade of unsustainable over-consumption – spending fueled in many cases by home equity loans and mortgage refinancings – U.S. consumers have reached the time where they have to pay the bill, and they’ve been paying-down debt at an impressive rate.

Not only that, U.S. consumers have increased their savings and are currently saving about 3% of their income.

The problem the above? It’s taken the world’s No. 1 shoppers out-of-the-mix, and in the process eliminated a major source of GDP growth for the world.

The solution to the above is obvious enough, but it’s not that easy: citizens in emerging markets have to consumer more. Emerging market zones with expanding middle classes such as China, India, Brazil, Argentina, Mexico, and Russia/Eastern Europe have to make up for the decline in U.S. consumer spending with some sustained spending of their own. Some nations, who follow large-export, low-consumption models, are reluctant to see domestic consumption increase, but from an economic growth standpoint, they’ll have little choice.

Further, the above is part of the elimination of structural imbalances that led to the global recession in the first place. It was unreasonable to assume that consumers in the $14 trillion U.S. economy could perpetually sustain the $61 trillion global economy. But so long as Americans spent, emerging markets didn’t heed the call to increase their consumption.

Now there is no other choice: the U.S. spending binge is over, and emerging market citizens must pick up the slack. Without the latter, it’s highly unlikely the global economy will be able to grow at an adequate 4.5-5 percent rate in the years ahead.

Health reform and a housing credit: Can Congress do two things at once?

2009-10-27T04:00:00.002-04:00

By Money Matters Editors

Can Congress do two things at once? Can it think and act at the same time? Money Matters knows it’s a lot, but we have confidence in our national lawmakers.

While also putting the final touches on health care reform bills about to be debated in the House and Senate, respectively, Congress is also getting set to extend the $8,000 federal income tax credit for first-time home buyers.

And, as Money Editors noted earlier, the United States needs both health care reform and an extension of the first-time home buyers’ credit.

Ideally, Congress should extend the program, which expires November 30, through the end of next year, or December 31, 2010. However, it appears Senate support will only go as far as extending the program on a tapered-basis, Bloomberg News reported. The full credit would be extended for homes that close before April 1. The credit would then be decreased to $6,000, then $4,000, then $2000 etc. for homes that close in each following quarters, until the end of 2010, at which time the program would end.

To be sure, the U.S. housing sector has shown signs of stabilizing, as new and existing home sales have trended up for more than a half-year. Still, economists and housing sector analysts are careful to point out that this year’s gains follow the largest decline in housing new/existing sales since the Great Depression, hence the sales gains are starting from a low base. Further, this year’s gains can hardly be categorized as self-sustaining: the housing recovery is young, and could easily stall.

Finally, some have argued against extending the $8,000 credit, saying the market should be left to determine the rate of sales and home prices, without additional tax-based stimulus. The response to that is: the market is working – just think of the tax credit as encouraging people who would buy now to make that purchase now, when that increased demand is sorely needed.

Again, a full $8,000 credit for all of 2010 is preferable, but if there isn’t support for that time period in Congress, a partial credit is better than nothing.

More pain at the pump: U.S. gasoline prices jump 18 cents in two weeks

2009-10-26T04:00:00.001-04:00

By Money Matters Editors

It looks like the U.S. is headed for $3 gasoline, again

This is not a pleasant sight for U.S. motorists: gasoline prices have jumped 17.8 cents in two weeks to an average of $2.66 per gallon for regular unleaded, according to data compiled by the Lundberg Survey, Bloomberg News reported.

The increase is due entirely to higher oil prices, Analyst Trilby Lundberg told Bloomberg News, with profits margins for refiners and gasoline retailers shrinking in the process.

Refiners and gas stations are caught in a bind. Demand is sluggish, due to the fact that more than 7.2 million Americans have been removed from the workforce as a result of lay-offs, and that makes it hard to pass on cost increases. At the same time, high oil prices mean their feeder costs are up, squeezing margins. Oil, which is trading close to $80 per barrel, is up more than 100 percent since December 2008, and is up about 20 percent in the past six weeks.

Hence, it looks like $3 per gallon gasoline will return, assuming oil’s likely march to $100. Why is oil rising? This time it’s largely due to the weaker dollar, but institutional investors (IIs) also sense rising demand in emerging markets on a strengthening global recovery.

The bottom line for the U.S.? Higher gasoline prices are a major drag on GDP: it eliminates money that Americans would use for discretionary purchases; higher fuel costs also increase business transportation costs and ripple though the U.S. economy.

The above underscores why the U.S. should further increase fuel/energy efficiency across its economy: the Obama administration has implemented some efficiency measures, but much more needs to be done. And until then, as gasoline prices rise, look for U.S. GDP growth to sag.

Washington cracks down on bailout bank executive pay: High time

2009-10-23T04:00:00.005-04:00

By Money Matters Editors

The Obama administration has decided to cut the pay of Wall Street executives at companies bailed out by the federal government, and Money Matters says, “It’s high time!”

The banks and financial institutions are against the crackdown, arguing that they need to continue to pay large salaries and bonuses to attract the top talent they need to run their operations.

Nothing could be further from the truth. There are thousands of unemployed investment bankers who would jump at the opportunity to work for a ‘mere $300,000 per year’ with a modest bonus.

Further, it offends the sensibilities of both the American taxpayer and the U.S. Congress that the very banks the American people are paying to stay afloat – and that have received hundreds of billions of dollars in federal money and guarantees – are at the same time paying their executives too much money.

Before these banks starting paying executives absurd sums of money, they will have to pay all federal money back. As the Obama administration said in so many words, if they don’t like the federal government’s terms, they can move to another country.

When will the Fed take the punch bowl away?

2009-10-21T04:00:00.002-04:00

By Money Matters Editors

In the months and quarters ahead, the U.S. Federal Reserve will face, arguably, its biggest decision in the modern era - certainly its biggest choice since the early 1980s, and possibly since the 1930s. Namely - when to start to withdraw quantitative easing - cash injections that provided essential liquidity to markets to end the financial crisis.

If the Fed withdraws funds too late, it runs the risk of increasing inflation - and some say increasing it to a very high rate - like the double-digit rates last seen in the early 1980s.

Conversely, if the Fed withdraws funds too soon, it runs the risk of having the U.S. economy fall into a double-dip recession.

What's the Fed likely to do? At this juncture, unless the price of oil, which Tuesday pushed through $80 per barrel, continues to rise, and present additional inflationary pressures, the Fed will likely maintain its current maximum-easing stance, at least through May 2010. A near-10 percent U.S. unemployment rate and continued, monthly job losses will weigh against any removal of quantitative funds. If, however, for oil-price-induced or other reasons, consumer prices and producer prices start to vault ahead in Q1 2010, then all bets are off, and the Fed may be compelled begin removing intervention/stabilization funds from the financial system.

Congress set to extend $8,000 home buyer tax credit

2009-10-20T04:00:00.001-04:00

By Money Matters Editors

It appears Congress is about set to extend the $8,000 federal income tax credit for first-time home buyers. The credit is set to expire November 30.

Some have argued against an extension, but Money Matters Editors disagree. On the contrary, the credit should be expanded, as well as being extended.

And the reasons are obvious enough: the housing sector affects literally dozens of spin-off/lateral sectors - everything from appliances, to furniture, to lawn/garden equipment, even insurance gets a boost when the housing sector does well. True, the post-bubble housing sector may not account for as large a percent of U.S. GDP as it did in 2003-20007, but it's still substantial. And the housing sector has been down long enough: Congress should extend the tax credit through September 2010, and broaden it to include individuals who are trading up, as well as first-time home buyers, primary residences only (no vacation homes).

Oil: At a crossroad

2009-10-19T04:00:00.001-04:00

By Money Matters Editors

Oil is at a crossroads, of sorts.

The oil bulls will argue that ramping demand in emerging markets, plus stabilization in the developed world, combined with the desire by selected institutional investors (IIs) to hold oil as an asset, will send the world's most important commodity closet to $80, then $90 per barrel.

Conversely, the oil bears argue that crude is way overpriced given brimming inventories and flattish global demand, and that a substantial price correction is overdue. These analysts also say cheaper alternate fuels, such as natural gas, will weigh on oil's price in the year ahead.

Which camp is correct? A lot will depend on U.S./global GDP growth in Q3, Q4 and in Q1 2010. Below-expectations GDP growth would send oil's price tumbling; above-expectations, and oil could trend toward $90 by mid-2010.

Dow surfaces above 10,000: but can it remain above it?

2009-10-16T04:00:00.002-04:00

By Money Matters Editors

Since the Dow is above 10,000 let’s briefly re-examine the world's most closely monitored stock market index, this time from a technical standpoint.

If the Dow can close above the psychologically-significant 10,000 mark for three straight sessions, that would be a bullish sign. Thursday was the second straight day, so Friday (obviously) looms large. Given that Fridays during sluggish-to-recessionary economic times are usually down days for the Dow, Friday represents a formidable hurdle for Dow 10,000.

Other relevant indicators: the Dow is substantially above the 50-day moving average (MA) – the second toughest average to break in trading – which is at 9,577. That’s a bullish sign. The Dow is also about 1,500 points above the 200-day MA – the toughest average to break in trading, another bullish sign.

Also, earlier this year, in July, the Dow recorded a golden cross – which is when the 50-day MA average crosses above the 200-day MA – another bullish sign.

In normal times, an argument could be made that the Dow has decent support at 9,600, then again at/near 9,200. But these are not normal times, but times when unexpected announcements – traders call them ‘objective events’ – change the trading and investing landscape. So unless the 'Saturday night surprises' (bank losses and write-offs) are done, one can not say the Dow has decent support, anywhere: this market has demonstrated that it can shed 300, 500 even 700 points very quickly, on unexpected bad news.

The bottom line for the Dow? The Dow assumes a recovering U.S. economy in the quarters ahead. Hence, the Dow’s performance will be determined by the Fortune 500’s Q3 earnings performance and, equally significant, by the outlook for Q4: if both exceed institutional investors’ (IIs) estimates, the Dow will move ahead comfortably. So far, given Intel’s (INTC) and Google’s Q3 earnings (GOOG), the Q3 earnings season is off to a decent start.

But if there’s an underperformance by the Fortune 500 in Q3 and the outlook for Q4 is not good, the Dow could easily revisit 8,000 or even 7,500.

After health care reform, what's next for Congress? Jobs, jobs, jobs

2009-10-15T04:00:00.002-04:00

By Money Matters Editors

After health care reform, what’s next for the U.S. Congress? Jobs, Jobs, Jobs.

Can there be any issue that’s more important than job growth? To cite a phrase often-used by a graduate school mentor of a Money Matters Editor, ‘We don’t think so.’

The nation has lost more than 7.2 million jobs in the recession that started in December 2007, and the unemployment rate has basically doubled to 9.8 percent. In a nutshell, the U.S. economy is operating well below potential – what economists call an ‘output gap.’

Accordingly, once health care reform is headed toward that great bargaining and deal-making forum called a House/Senate conference committee, Congress needs to get going on initiatives that will jump-start job growth. Here are some ideas:

-Lower the capital gains tax to encourage more investment.

-Pass a series of targeted investment tax credits for high-value-added sectors that are likely to be star performers in the economy of the next decade. The tax credits should stipulate that the company must retain most jobs in the United States.

-Temporarily suspend the payroll tax, or at least consider giving small businesses more time to pay the tax on new hires, as a way of providing an incentive to hire.

-Accelerate federal infrastructure programs and grants to states, where possible, to get as many infrastructure/construction workers employed as is reasonably possible during the next 15 months. The goal is to increase demand from all pressure points to give the U.S. economic recovery more momentum.

-Extend both existing unemployment and food stamp programs: numerous studies have shown that dollars from both of these programs are spent quickly – i.e. they create demand for goods quickly– and demand for goods leads to jobs.

-Increase both student loan guarantees and grants for undergraduate / graduate study. Now is not the time to cut federal aid to higher education. On the contrary, Congress should be increasing aid to higher education because millions more Americans will be returning to school. Further, with that return to campus, the United States can make the best (new skills) out of a negative (lack of jobs): now is a great time for millions of adult Americans to learn new skills, and, in some cases, to train for an entirely new career. Or as one former, six-figure mortgage bank executive told a Money Matters Editor recently, “The demand for $500,000 per year mortgage bank executives is weak now. Very weak.” He’s now re-training to be a mechanical engineer: in two years, he will be one. Congress should encourage re-training via increased grants and loan guarantees to train a whole new generation of mechanical engineers, electrical engineers, architects, scientists, chemists, physicists and teachers. And did we mention health care reform? We’re going to need many more general practice physicians to treat those 30-45 million additional citizens regularly accessing health care services. That goes for nurses and surgeons, as well.

To review: Lower the capital gains. Pass investment tax credits for promising, next-generation sectors. Suspend the payroll tax. Increase aid to education to turn this down-time for some into the period of most-beneficial training they’ve ever had in their life. All of the above will help put the nation back to work.

Now it’s now for Congress to get to work, on all of the above.

U.S. tax on corporate revenue earned abroad is deferred: Good going

2009-10-14T04:00:00.004-04:00

By Money Matters Editors

The Obama administration has shelved plans to increase taxes on multinational corporations by more than $200 billion, The Wall Street Journal reported Tuesday, after businesses complained the taxes would decrease commercial activity and hurt the creation of jobs.

And to the above, the Editors of Money Matters say: smart move! Businesses will have a hard enough time both retaining existing employees and adjusting to the new, likely requirements under the upcoming heath care reform legislation. Outside of health care reform – which also has the potential to lower corporate health care premiums, long-term, if competition increases - this is no time to add to business mandates: their operational models are being stressed enough by the recession.

One tax exemption that has been extended, but that the Obama administration may re-visit next year: the deferral on paying taxes on revenue earned abroad, The Journal reported. Critics say the law encourages U.S. companies to avoid paying U.S. taxes by expanding operations overseas. Companies contend the deferral allows them to compete globally.

Further, the Obama administration’s willingness to delay the tax is another example of President Obama’s centrist, open-door, cross-ideology approach to governance and policy. Contrary to some on the right, Obama time and again has shown himself to be a pragmatist whose not wedded to either liberal ideas or conservative ideas: he chooses a left-of-center solution here, if it works; then a right-of-center solution there, if that works.

A classic example, in addition to the corporate tax exemption, is the issue of the public option in health care reform. Obama has never made it a requirement, and has often stated if the Congressional votes aren’t there, he doesn’t want the public option to jeopardize the 10 other goals he wants health care reform to achieve.

Now, what business executives and Obama administration officials should do is sit down and agree on investment tax credit policies that will create jobs in the United States. We’re not talking about job subsidies: we’re talking about incentives to invest in and access an American strength: its high-productivity, skilled work force. Investment credits will help put the great American job creation machine in motion again.

Dow 10,000? The real thing or a mirage?

2009-10-13T04:00:00.003-04:00

By Money Matters Editors

Dow 10,000. Is it that important? As Shakespeare wrote, in Romeo and Juliet in 1594, “What’s in a name? That which we call a rose, by any other name would smell as sweet.”

Well, those market analysts who use technical analysis would argue that Dow 10,000 is a psychologically-significant level and name, but it’s not a technically-significant level.

Technical analysts say the Dow might close above 10,000 for a day, then fall back – and if it does, that would be bearish for stocks. Conversely, the Dow might pull-back considerably - technicians call it a correction - then rise above and close above 10,000 for three straight days, and if that occurs that would be bullish for stocks.

But what do economists say about the Dow? Well, the consensus argues that the Dow’s approach to 10,000 is rational. In pushing the Dow up from about 6,500 to close to 10,000, institutional investors (IIs), based on an evaluation of economic data and other metrics, believe the U.S. economy will be in recovery – in better shape – in March 2010 or June 2010 than it is today, and they’ve bid-p stock prices. This is consistent with the Dow’s lead indicator status: it’s a reflection not of current economic conditions, but what IIs think economic conditions will be 6-9 months ahead.

Even so, there is a small camp of economists who argue the opposite. They argue the Dow is way overvalued – it’s risen too much, too soon given likely U.S. economic conditions in early/mid 2010 - and will fall considerably, once these conditions are fully-known in the months ahead. Buy stocks now and you’re looking at a considerable hair-cut, in the immediate quarters ahead.

Key data: earnings and guidance

What will likely decide this tug-of-war between the economic bulls and bears, and ultimately decide if 10,000 is a legitimate base or a Pyrrhic high? Well, in addition to a slew of U.S. economic data, investors should focus on Q3 earnings reports from Fortune 500 companies. But not just the earnings reports - identify what guidance companies are giving concerning they’re outlook for future revenue and earnings for Q4 (or the December quarter) and the next fiscal year.

If most companies meet/exceed Q3 earnings estimate and they also raise earnings guidance for Q4 (or the December quarter) and the next fiscal year, IIs will interpret this as a sign that corporate America is becoming more confident about the U.S. economy and/or believe conditions are improving. If this is the case, the IIs will bid-up stock prices more, and Dow 10,000 will be a base.

However, if companies underperform in Q3 and also lower earnings guidance for Q4 (or the December quarter) and the next fiscal year, IIs will take it as a sign corporate America is still not that confident about the economic recovery. And if that’s the case, Dow 10,000 won’t likely hold for long.

Shale gas: The new, cheap, abundant energy form?

2009-10-12T02:00:00.024-04:00

By Money Matters Editors

You know the business press and general public have finally recognized a trend when they give it a label.

Case in point: unconventional natural gas – previously hard-to-access natural gas that now can be captured by new technologies. Some are calling it the natural gas revolution, with the downward price pressure a ‘shale shock.’

Money Matters first wrote about it on September 23. Estimated U.S. natural gas reserves have increased 35 percent, mostly on the ability to access these new sources, with estimated reserves totaling 2,074 trillion cubic feet in 2008, up from 1,532 trillion cubic feet in 2006, according to the Potential Gas Committee, The New York Times reported. Natural gas closed Friday down 19 cents to $4.77 per million BTUs (MMBtu).

New technology, including hydraulic fracturing and drilling horizontally, has opened hundreds of previously cost-prohibitive natural gas sites. U.S. drilling has been going on in earnest for more than three years, but global drilling has only just begun.

How significant is unconventional natural gas in the nation’s and world’s energy policy? Oil/energy analyst Daniel Yergin, co-founder of Cambridge Energy Research Associates (CERA), has called unconventional natural gas “the biggest energy innovation of the past decade.”

Further, even the most conservative estimates point to an large increase in natural gas reserves, based on the new extracting technology: at least a 20 percent increase in the world’s known natural gas reserves, The New York Times reported. Further, one recent study by CERA calculated that recoverable, unconventional natural gas, also called shale gas, outside North America could turn out to be the equivalent of 211 years worth of natural gas consumption in the United States at present demand levels, and possibly as much as 690 years! To put that in a global perspective, the low estimate is 50 percent of the world’s known gas reserves; the high estimate, 160 percent.

Big impact in Europe

In Europe, companies are leasing huge tracts of land, The Times reported, and early forecasts point to 40 percent increases in natural gas reserves by country, on average, on the continent. If there’s that much shale gas in Europe, that could reduce Europe’s dependence on Russian natural gas.

In Asia, the prospects are just as promising. Emerging market, high-growth economies China and India appear to have large potential for shale gas production.

The climate change implications of the above for the Americas, Europe, and Asia are significant; natural gas is the cleanest fossil fuel. Abundant, relatively cheap shale gas could encourage countries to switch from coal to natural gas for electric power generation and, in some nations, from gasoline to natural gas for vehicles. In the U.S., natural gas could become dominant in residential heat in all regions of the country.

Will unconventional gas / shale gas become the new, inexpensive, abundant energy form of the next decade? It’s far too soon to tell, given the infancy of the technology used to extract the fuel. Further, if the law of supply and demand applies with new natural gas (it doesn’t seem to currently apply to oil), shale gas’s price will rise as systems convert to the energy/fuel and demand rises. Or, it may not rise as much – or may rise but remain comparatively cheaper than other energy forms. But that’s getting ahead of the shale gas development curve: first, let’s see if the large increases in natural gas reserves forecast begin to materialize in the next two years ahead. Money Matters will also keep an eye on natural gas prices.

But if there is as much shale gas is in the ground as geologists believe, shale gas could represent a breakthrough energy form for the U.S. and world – and a cleaner one that can act as a bridge between fossil fuels and renewable energy forms.

In addition, for the United States, shale gas has the potential to reduce the use of crude oil: any cleaner, competitive energy form that reduces U.S. crude oil use is a move toward energy independence – one that also enhances foreign policy flexibility.

The Bush energy policy: Iraq – less oil and higher oil prices

2009-10-09T04:00:00.006-04:00

By Money Matters Editors

It will take the United States and the world perhaps two decades to recover from the mistakes of the George W. Bush presidency (2001-2009). Certainly it will take longer than one 8-year presidential administration. Of all the policy mistakes, perhaps the Bush energy policy, or lack thereof, will be the most costly.

Money Matters will look at the Bush energy policy mistakes in four parts over the next four weeks. Today: Iraq.

The 2001 Bush income tax cut that promptly turned a U.S. government budget surplus into a budget deficit will perhaps be viewed by economists and historians as the Bush administration’s most economically damaging policy. But a close second may very well be Iraq.

Not that the removal of tyrant Saddam Hussein was a mistake: it wasn’t. But the Iraq campaign was pursued incorrectly: the U.S. should have worked in union with its European and other allies and used other measures to ease Hussein from power.

Price of oil: it hasn’t dropped

One of the ‘selling’ points of the war was the prediction that a more-just, more-democratic government in Iraq would result in the development of Iraq’s vast oil reserves, and that the price of oil would remain low. Oil, which traded around $30 per barrel (in 2009 dollars) before the war, rocketed to a record-high of $147.27 per barrel during the leveraging boom. It’s currently trading around $71 per barrel. True, other factors influence the price of oil, and also the price of gasoline in the U.S., but the end result is that Americans are paying twice as much today for gasoline and heating oil as they were before the Iraq War. That’s hardly a lowering of oil’s price that Bush predicted would occur.

And Iraq’s production? It’s recovered to roughly what it was before the war: about 2.7-3.0 million barrels per day (bpd). That sounds impressive but it isn’t, when one considers Iraq’s vast reserves and oil production potential: Iraq should be producing 6 million bpd – double its current output. Imagine what an extra 3 million bpd would mean to global oil markets? And to the global oil supply cushion (spare capacity)? Each would have benefited consumers in the U.S. and abroad by resulting in an oil price that would have been lower than what we’re experiencing today.

Moving forward, there is hope that, provided all parties in the new Iraq government can share the oil wealth fairly and continue to build the institutions of governance, Iraq’s oil can eventually reach impressively higher levels. But the aforementioned will come in spite of the flawed Bush campaign in Iraq – a campaign that did not lower oil prices nor increase Iraq’s oil production. Simply, Bush’s Iraq campaign was a major national energy policy mistake for the United States.

Welcome to Money Matters

2009-10-09T02:00:00.001-04:00

By Money Matters Editors

Welcome to Money Matters, a web site about stocks, sectors, investing, macroeconomics, and more. Our focus is on the markets and the economy, but really, if it’s about money, it’s fair game here. We offer independent news, analysis, commentary, and research to help you, the investor, make more-informed investing decisions.

Further, because our focus is on you, the investor, we want to hear from you to make our service better. Please offer your thoughtful comments in the comments section provided.

Money Matters has assembled a team of experienced reporters, analysts, columnists, and economists with one goal in mind: to help you navigate through these challenging times.

Our Stock Reviews by our stock analysts are based on an independent, proprietary stock investment formula, not affiliated with any bank, brokerage, or research service. If you’re looking for a stock to invest in, low risk to high risk, be sure to check out our Stock Reviews.

Thank you for visiting Money Matters, and visit us again soon.

-Money Matters Editors

It’s time to end guaranteed compensation for mutual fund managers

2009-10-09T01:10:00.002-04:00

By Money Matters Editors

One long-standing investment community practice in need of revision is the management fee, particularly among mutual funds.

The practice of financial managers charging a 1.0 percent of even a 0.7 percent management fee - exclusive of performance – has to end.

The reason? The fee simply amounts to guaranteed pay, regardless of performance. With the fee, if a mutual fund does well, the management team collects a fee; if the fund does horribly, the team collects a fee, usually with comments asserting that ‘the fund would have performed better during the year, but market conditions were against us.’ Where’s the incentive for stellar performance under that system? Little exists.

Pay for performance, not guaranteed compensation

What’s a better system? Paying mutual fund managers a very modest salary – like under $75,000 per year – not the $400,000 and $500,000 and up salaries one typically sees – and then may a sliding bonus, based on performance. If the fund achieves its investment objectives, a 100 percent bonus is paid to managers – some total that would bring them close to their former pay. However, if the fund doesn’t achieve its objective – no bonus is paid. The new standard is an application of the true merit standard for fund managers: you eat what you kill.

Mutual funds have done a fair job reducing expense ratios in the past two decades, but much more reduction is needed. And most certainly what has to go is a fee that guarantees that the fund’s managers are issued their high salaries, even if the fund’s investors don’t make any money. That’s absurd, it’s anti-merit, and it’s yet another extension of players in the investment community ‘preaching capitalism, but practicing socialism’ – i.e. saying its o.k. for others to have to live under pay-for-performance standards, but not themselves.

The hope is that competitive pressures among asset classes will compel mutual funds to make this long overdue change. And when they do, the investing public will be that much better off: they’ll know that the only time their mutual fund manager is making serious money is when they, the investors, also are making serious money.

Exchange-traded funds: Time to jump in?

2009-10-08T04:00:00.004-04:00

By Money Matters Editors

Exchange-traded funds, which issue securities backed by the item invested in, have become a popular way for typical investors to play the commodities market. The question is, should you invest in an ETF?

In a word: no. Exchange-traded funds do give investors access to commodities, but the premise is flawed: typical investors should not be investing in commodities at the source, to begin with.

And the reason is obvious enough: commodities are a highly-volatile, unpredictable investment class. Consider the U.S. gasoline market: there are more than 20 variables that can affect the price of regular unleaded gasoline. Natural gas has almost as many variables. ETFs do very little to change the above. Don't misunderstand: ETFs are not gimmicky, but they are quirky.

In other words, typical investors should limit their investments to stocks, corporate and municipal bonds (including federal bonds), mutual funds, FDIC-backed savings, and perhaps a modest amount (2-10% your portfolio) of gold. And by gold, Money Matters means gold bars, not the ETF Spider Gold Trust (GLD). Ask your local banker or accountant about how to buy bars.

The better investment – stocks or ETFs?

Now, if you’re interested in investing in commodities, just do it conventionally, via stocks, based on your risk tolerance. Invest in a pure-play or near-pure play stock that does not exceed your risk tolerance.

Further, think long-term: at least 7-10 years. Money Matters does not recommend attempting to try to time the market, or rotating out of stocks after a short investment period. As the grandfather of one Money Matters Editor said frequently, “Don’t run for cover every time the market hic-cups!”

For example, if you can tolerate moderate-risk and want to invest in oil/natural gas, consider: Exxon-Mobil (XOM) or ConocoPhillips (COP). Both are currently at bargain prices. If you can tolerate high-risk, consider Southwestern Energy (SWN).

If you can tolerate moderate risk, and you’re looking for a copper/gold play, consider Freeport (FCX). For a potash play, consider Potash (POT) or Mosaic (MOS).

Again, Money Matters underscores the need to think long-term, at least 7-10 years. Money Matters won’t recommend a publicly-traded company or investment that does not have a strong prospect to remain in business and thrive.

Investing in commodities via stocks may not be as glamorous or as sexy as the ETF fad, but long-term, Money Matters argues your portfolio will look a whole lot more attractive.

The inflation hawks circle: For U.S, it's cut the budget deficit, or else

2009-10-07T04:00:00.006-04:00

By Money Matters Editors

Now the road gets a little bumpier. For years, the United States ran large deficits with near impunity - with low inflation and relatively low interest rates. That may be starting to change.

On Tuesday, investors bid-up the price of gold to a record high close of $1,033.90 per ounce. Gold had hit an intra-day high of $1,045 per ounce earlier in the day. (To view a price chart for gold click here.)

Historically, institutional investors (IIs), bid-up gold when they sense that inflation will re-heat in the quarters ahead. The culprit in Tuesday’s rally was the former, and also some chatter that there may be a move to price crude oil using a basket of currencies or a basket of currencies plus gold – either of which would be bearish for the dollar. Some major economic leaders are growing increasingly concerned about possible further weakness in the dollar and a rise in inflation, due to the U.S.’s large plus-$1 trillion budget deficit.

Up until now, IIs, including major U.S. bond holders, expressed little concern about the dollar or inflation: they were content to buy U.S. debt. But that was during a period of ‘relatively minor’ deficits of about $300 billion per year. The phrase ‘relatively minor’ is used because a $300 billion deficit in $1.5-2.0 trillion federal budget was still a large some of money. But it pales in comparison to the $1 trillion budget deficits precipitated by the bank bailout out and fiscal stimulus package.

In other words, during normal times, IIs were content to buy U.S. Treasuries, despite a world awash in dollars. That really benefited the U.S., despite its profligate ways: it kept the dollar artificially higher, and kept interest rates relatively low.

Gold, oil rise on inflation fears

But now, it appears, the United States has reached the limit of institutional investor patience regarding all those dollars floating around in the world. The price of oil and gold have risen this year, as both an inflation hedge and protection against further weakening in the dollar. The nascent economic recovery in emerging markets will also likely cause IIs to rotate some money out of U.S. Treasuries and into higher-return investments in the developing world, and if that occurs, long-term U.S. interest rates will rise – another hurdle for the U.S. economy, as it attempts to pull out of its pronounced recession.

What can Congress and other U.S. policy makers do to support the dollar, reduce the risk of inflation, and help keep long-term U.S. interest rates low? Cut needless federal spending and raise taxes to demonstrate to IIs that the U.S. fiscal condition will trend toward a balanced budget in less than 10 years. There are no easy, pain-free solutions to the U.S.'s fiscal problem. Underscoring, the U.S. must implement these difficult measures or face the wrath of the IIs: every nation must pay its bills. Or, as we say in the states, “There’s no such thing as a free lunch.”

Health care reform update: The politicking has only just begun

2009-10-06T04:00:00.004-04:00

By Money Matters Editors

Health care reform update: Assuming a health care reform bill makes it out of the Senate Finance Committee - and one will - two, major hurdles remain: the Senate and the likely conference committee reconciling differences with the House’s health care reform legislation. Neither of these hurdles will be easy to mount.

Senate Majority Leader Harry Reid, D-Nevada, has the difficult task of trying to maintain liberal Democratic Senators’ support for the bill without angering Moderate Democrats. It’s critical that Reid retain at least 60 votes for the bill – in any combination – because a Republican-dominated coalition is set to filibuster any bill that falls below 60 votes, the level needed to invoke cloture and end a filibuster. In the United States, due to the filibuster’s unlimited debate provision, having a simple majority doe not mean you can govern: ‘in the Senate, it takes 60 to govern,’ as they say on Capitol Hill.

(Decades ago, a filibuster was rare. Today, in Washington’s highly partisan environment featuring two polarized parties, the filibuster is used routinely. The great former Senate Majority Leader, and President Lyndon B. Johnson is turning over in his grave!)

Is Sen. Reid ready?

What’s Sen. Reid likely to defend? The bill that makes it to the Senate is likely to have large, sliding-scale federal subsidies to help poor and working classes families pay for monthly health care premiums, along with a federal mandate requiring every American to purchase health insurance.

The bill will also likely require businesses to offer health care insurance to all employees, although there may be an exemption for small businesses. Those businesses required to purchase health insurance that don’t do so would have to pay into a fund for the same.

Further, in addition to Medicare changes aimed at lowering costs, the bill probably will contain an expansion of Medicaid, as part of a plan to provide insurance to the poor, and also contain health insurance exchanges aimed at increasing competition in markets across the United States. Total cost of the Senate bill? Probably $900 billion, with a net-zero increase in the U.S. budget deficit.

Meanwhile, probably on a party line vote (or close to it), the House will likely pass a health care reform bill with a public option; the Senate bill undoubtedly will not contain one. And that’s when the real fun begins: the conference committee to reconcile bill differences.

In the conference committee, up to a dozen members from each chamber, mostly Democrats, as they are the majority party, negotiate and resolve bill differences. And the emphasis is on negotiate, but really it is politicking and logrolling: more bills have been substantively changed in conference committee than one can imagine. Merit is usually the first casualty. Further, lawmakers frequently ‘trade’ votes - or logroll - to get preferred items retained in the bill. ‘Christmas tree’ items appear – usually from a powerful Senator or House member: these are items that have nothing to do with bill, but are included so as to keep a key Senate or Representative ‘on board’ i.e. supporting the bill.

As the above suggests, while the health care reform debate may seem long and, to some, interminable, the real debate on policy – the one driven by power-based coalitions and horse-trading in the conference committee – has only just begun.

Congress should extend the $8,000 tax credit for first-time home buyers through Jan. 1, 2011

2009-10-05T04:00:00.007-04:00

By Money Matters Editors

Perhaps it’s time for the U.S. Congress to renew the $8,000 federal income tax credit for first-time home buyers. The credit expires November 30.

And the reasons are obvious enough. First, the current economic consensus projects only tepid U.S. GDP growth of 1.0-1.5 percent in the early stages of the next economic expansion – hardly the stuff of massive job creation outside of the housing sector. In other words, the output gap in the U.S. economy is likely to persist, even as the recovery progresses.

Second, the housing sector, while showing signs of stabilization, still isn’t experiencing enough traffic/demand from potential home buyers. Many prospective home buyers have adopted a ‘wait-and-see’ approach – delaying purchases, hoping for a further decline in prices. Translation: there are a lot of fence-sitters, and the $8,000 credit may be just the incentive needed to nudge these likely-but-waiting home buyers into the market.Further, the extra home buying activity will create some jobs by increasing demand for appliances, furniture, home services, and insurance, as an increase in home buying historically has done.

Third, the most recent jobs report from the U.S. Labor Department indicated that the U.S. lost another 263,000 jobs in September – well above the roughly 170,000 estimate – and that has thrown a scare into investor and business executive circles that job losses are not subsiding. The significance? Demand – the key to increasing corporate revenue and earnings – is already light, and could get even lighter if job losses do not subside soon. Some economists are even concerned about a possible double-dip recession.

Finally, the specter of continued job losses has also sparked talk of at least extending certain items of the $786 billion fiscal stimulus package and/or passing a new package. Republicans in Congress are certain to oppose Democrats on any additional spending, on grounds that the U.S. has reached its fiscal limits with current $1 trillion deficits projected for last year and this year, Fiscal 2010. Still, an extension of unemployment benefits, along with elongated aid-to-the-states would help maintain demand at a time that it’s sorely needed.

More stimulus needed…from somewhere

Meanwhile, extending the $8,000 federal income tax credit for first-time home buyers would supplement the above. It’s unlikely Congress will approve more than $200-300 billion more in fiscal stimulus, hence the $8,000 credit will provide much-need stimulus. At minimum, the Congress should extend it with tapers - $8,000 for home buyers who purchase before April 1, 2010, $6,000 for home buyers who purchase before July 1, 2010 etc., to signal to fence-sitters that a bargain awaits them, but it won't last forever.

Again, ideally, Congress should pass a second large stimulus package, but in absence of that, the $8,000 home buyer credit and extended benefits will create demand. The U.S. economy needs all the demand it can get in order to end this pronounced contraction and return the nation to a condition in which it’s creating at least 150,000-200,000 jobs per month, with expanding prosperity.

How can the U.S. Congress help strengthen the dollar?

2009-10-05T02:00:00.004-04:00

By Money Matters Editors

One of the ways the U.S. government can strengthen the dollar is an obvious one: cut the budget deficit, including a tax increase to pay for the Iraq War and Afghanistan War.

The U.S. Congress made many policy mistakes in the past eight years prior to the Obama administration, and one of them was spending money on the Iraq War and Afghanistan War without first raising a tax – an income tax or otherwise – to pay for it.

The result? More than $1 trillion was added to the national debt and the dollar has fallen against most of the world’s other, major currencies. The latter’s depreciation was help boost the price of oil, current around $70. (Among other factors, oil prices tend to rise as the dollar falls because the dollar is priced in dollars.)

Income taxes won’t be raised any time soon, due to the fragile, nascent economic recovery, but after the recovery is underway, the budget deficit has to be cut to strengthen the dollar – and that means a tax increase along with spending cuts, and health care reform to decrease the cost of Medicare – and hopefully Medicaid – on an outcomes achieved basis.

It’s too early to evaluate the free enterprise system

2009-10-02T04:00:00.001-04:00

By Money Matters Editors

These days, it’s become popular to criticize the free market system, or capitalism, and much of it is justified.

Over-leveraged banks, home owners who treated their houses as ATM machines or who bought homes they could not afford when interest rates reset to normal rates, and mortgage lenders who granted curious and in some cases absurd mortgages to home buyers, all played a role in creating the financial crisis. And others were complicit. It was a tragic play involving debt, too much debt, and fraudulently obtained debt, and it is deserving of rebuke.

Still, from another perspective, much of the criticism that’s occurring now in many places is off the mark and out of place.

It’s off the mark in that it frequently looks for single-person or single-institution scapegoats or ‘causers’ of both the crisis, and now, of the debt burden the United States. and world will be paying back for years.

It’s out of place in that this is not an appropriate time to form conclusions about the effectiveness, social impact, or morality of capitalism, of the free enterprise system. And the reason why it’s not? The system is not at equilibrium. Just as it wasn’t fair to evaluate the free enterprise system during the leveraging boom, when housing prices were increasing at better than 10 percent per year, and seemingly anyone could obtain a mortgage to buy three condominiums as investment property in Las Vegas or Florida with no money down, so it’s also unfair to evaluate the free enterprise system now, during the slow recovery from the leveraging bust, when many small/medium-sized businesses still can obtain not the loans they need to expand commercial operations, and likewise good-credit, prospective home buyers can’t obtain mortgages. Both the boom and the current bust periods present a distorted picture of free enterprise, hence no accurate generalization can be reached about the system at the current time.

In other words we know the free enterprise system – capitalism – will be different. But at this juncture we can not say the free enterprise system will not resume producing its many benefits, the chief among these being - entrepreneurship, innovation, ingenuity, dynamism, risk taking, wealth building, a more-efficient deployment of resources, self-enrichment, and the primacy of commerce.

We’re just too early in the post-financial crisis era to reach any enduring conclusions regarding the above.

Welcome to Money Matters

2009-10-01T12:30:00.001-04:00

Want lower gas prices? Cut the U.S. budget deficit

2009-10-01T04:00:00.001-04:00

By Money Matters Editors

Americans do a lot of complaining about the price of gasoline. What’s one good way to lower gas prices? Cut the U.S. budget deficit! You read correctly - cut the budget deficit. Here’s why:

Oil has many roles in our modern world. It is, as everyone knows, the primary fuel for transportation in the developed and now in the developing world, too. In the United States, it’s clearly the most important commodity, given the nation’s enormous gasoline use, and consider this staggering statistic: one of every 10 barrels of oil in the world is used to make gasoline for U.S. motorists. Astounding. Talk about a car culture.

But what many motorists – and some investors – do not know is that oil has other roles in the modern world, namely as an asset for investment, hedge, and related funds. Further, some investors buy oil as an inflation hedge. And it’s those two, latter roles, as an asset and as an inflation hedge, that explain the connection between the U.S. budget deficit and price of gasoline in the U.S.

The deficit / oil connection

Oil is priced in dollars. Hence, when the dollar weakens, the price of oil rises: investors bid-up the price of a barrel of oil as a way to protect the purchasing power of that oil. It works like this, ‘A dollar is worth less, so I have to raise the price of my dollar-denominated goods in order to protect my purchasing power associated with that good.’ Oil closed Wednesday up $3.90 to $70.61 per barrel.

The reverse is also true: as the dollar strengthens, it exerts a downward pressure on the price of oil. But, as investors know, lately the dollar has not been rising. Basically, the dollar has been weakening for the past decade, and the reason is? You guessed it: the enormous U.S. budget deficit.

Sector analysts’ estimates vary, depending on the model they use, but roughly 10-25 percent of the current price of oil is solely due to the U.S. budget deficit, which in the current fiscal year, fiscal 2010, will exceed $700 billion, according to the Congressional Budget Office, and may approach $1 trillion, if the U.S. economic recovery does not take hold. (The U.S. budget deficit for fiscal 2009, which ended September 30, is expected to total $1.28 trillion.)

In other words, $7-18 of the current price of oil can be attributed to the budget deficit and the weak dollar it has created. Assuming a roughly 2.5 cents increase in the price of a gallon of gasoline for every $1 increase in oil, that translates to 17-40 cents more per gallon at the gas pump. Think of that extra 17-40 cents as an extra tax you pay on gasoline, solely due to the budget deficit.

Of course, many other factors affect the price of gasoline (gasoline supply/demand, refiners’ capacity, environmental regulations requiring reformulated gasoline, geopolitical risks that threaten oil production, emerging market demand for oil, speculation, etc.) but the link between the dollar (and hence the U.S. budget deficit) is beyond dispute.

And, the budget deficit/oil price connection is underscored here because, unlike OPEC and other factors, the budget deficit is a factor that Americans can control.

So onto the many other reasons for cutting the deficit (fiscal responsibility, remaining an attractive place for investment capital, lowering interest payment costs, reducing the debt burden on future generations, keeping interest rates low) add another: it will lower the price of gasoline.

It’s a small world: what leaders must do to achieve a healthy global economy

2009-09-30T04:00:00.005-04:00

By Money Matters Editors

The previous global economic expansion was riddled with structural imbalances. Provided the balances are addressed, a global economic recovery will follow, but the task is huge.

Economists and policy makers are starting to call the previous economic expansion the ‘Bush era’ or the era of the pseudo-economic boom - a period when unsustainable borrowing by American citizens masked, for a short period, structural imbalances that almost guaranteed that the U.S. and global economies would fall into recessions.

Those imbalances were laid bare once the U.S. home-as-ATM era ended when the U.S. housing sector collapsed, and the correcting of those imbalances is one reason the recession has been long and deep. Investors should monitor the major economies’ progress at ending these imbalances. Here’s an update:

1) China’s over-saving and lack of consumption. Since its shift to a market-oriented economy, China’s savings rate has exceed 20 percent and its consumption rate as a percentage of GDP has lagged those of developed economies. Investment-based, export-oriented China’s philosophy was ‘make it cheaply, ship it to the west, and reap the rewards.’ The problems with that economic model are manifold, not the least of which is - when export demand disappears, so does the growth - and that’s why China’s GDP growth was cut in half during the global recession.

Since the slowdown’s start, China has done a decent job increasing domestic consumption and stimulating demand, but more must be done: tens of millions of Chinese citizens must become regular consumers, if the global economy hopes to have demand sufficient for adequate GDP growth. (Other emerging market nations, such as India, Brazil/Latin America, Russia/Eastern Europe and the Middle East, must also increase consumption to make-up for declines in U.S. consumption.)

2) U.S. over-consumption, under-savings. There’s been considerable progress in the land of the free: after a decade of unsustainable, home equity loan and refinancing-fueled over-consumption, Americas have cut back their spending. Some are calling the shift the ‘frugal consumer’ era, arguing that it will be a long-term trend. Similarly, after a decade of saving little, Americans are saving about 5 percent per year, and there is chatter that it may rise to 8 percent.

3) U.S. trade deficit and budget deficit. Further, the U.S. trade deficit is decreasing, due to fewer export purchases by those now frugal consumers, and the U.S. could begin to register a trade surplus as early Q4 2010. However, the U.S. budget deficit remains too high, at roughly $300-400 billion, excluding fiscal stimulus and bank bailout money. Health care reform will help cut entitlement spending (Medicare, Medicaid), but more spending cuts are needed, as is a tax increase on upper income Americans. For sustainable global growth to occur, the United States must be fiscally and economically sound, and that requires a balanced budget – fiscal discipline. By balancing its budget, the U.S. will show the world that it can live within its means, continue to serve as an attractive source for investment, and will not undertake policies that increase inflation, interest rates, or weaken the dollar.

4) Inordinate leverage and borrowing. In the wake of the September 11, 2001 terrorist attack, the U.S. Federal Reserve and other major central banks cut interest rates to limit the calamity’s impact on commerce. The monetary response was appropriate. The problem was, however, the ‘easy money period’ was too long, and it encouraged reckless mortgage lending, and high-risk business models. One classic example: American International Group (AIG), an insurance company that operated more like a hedge fund, as a result of its use of credit default swaps and excessive leverage. Some business models were intrinsically problematic, such as those banks that were leveraged at more than 40-to-1.

Since the onset of the financial crisis, the major economic powers have done an adequate job shoring-up systemically-critical banks and financial institutions. And leverage? The crisis has reduced leverage to the point where, now, the larger problem is a lack of lending and too-strict lending requirements, certainly with regard to commercial operations and home mortgages.

5) Too many export-dependent economies. In trade, the global economy faces, arguably, its toughest hurdle. Globalization – basically the establishment of free markets around the world and the transfer of production to lower-cost labor regions – increased trade tremendously during the 21st century’s first decade. The export-for-income-and-wealth-gains model became dominant. But as these new, national economies took the global stage, did anyone bother to think of who was going to continually buy the flood of new products and manufactured goods entering the global market? Or what would happen to these export-oriented economies if the trade gravy train suddenly stopped? Apparently, not enough did, and the result was, when the U.S. economy ceased to be consumer for the world, the current pronounced recession. Needless to add, this structural imbalance must be corrected for sustainable global GDP growth to occur.

In sum, the major economies have made progress regarding the most important structural imbalances, but much more work remains. The United States must eliminate its budget deficit and continue to save and invest more. And, equally critical, China and the rest of the developing world must consume more: in other words, the global economy must become an economy with multiple engines of growth, not just one. If that occurs, sustainable global GDP growth will ensue; but as of today, we’re still a long way from that goal.

U.S. inches closer to universal health care

2009-09-29T04:00:00.003-04:00

By Money Matters Editors

Those who sampled the Senate Finance Committee’s debate on health care reform on Monday and Friday on C-SPAN undoubtedly came away with one certainty: some type of health care reform bill will be passed this year. It’s exact shape? Stay tuned.

That the United States is likely to reform its gargantuan $2.5 trillion health care sector is a plus, for citizens and corporations alike. That’s because the nation will slowly move away from the current untenable system of the uninsured showing up at hospital emergency rooms for basic care, at a cost of $1,000 per hour and up.

Further, it doesn’t take an MIT mathematician to figure out that any insurance or comparable health care program that enables those without insurance to access primary care from a local doctor/general practice physician eliminates a major cost increase area in the system. The United States should have implemented a basic health insurance plan decades ago: had it done so, many hospitals would not have incurred the enormous costs that they have from treating the uninsured in emergency rooms.

Snowe’s trigger option eyed

What form will the new insurance program take? Although some Democratic Senators on Senate Finance may try to push for a public option, a more moderate bill - one that pays subsidies on a sliding scale basis to the uninsured poor/working poor to help them purchase private insurance – is more likely. Also, U.S. Sen. Olympia Snowe, R-Maine, and a critical swing vote, has proposed establishing a ‘trigger’ for the public option that would take effect in markets with insufficient competition, thehill.com reported Monday.

If Snowe’s ‘trigger’ option holds, it may represent a suitable compromise between liberal Democrats, who want a public option, and nearly all Republicans and centrist ‘Blue Dog’ Democrats, who are dead set opposed to it.

Meanwhile, a tax on ‘Cadillac’ insurance plans probably will not be included in the bill, due to opposition by organized labor, The New York Times reported.

With, the 'Cadillac' tax out, the other major savings area in health care reform is likely be more efficient Medicare and Medicaid systems. On Medicaid, any poor person(s) who accesses care via the proposed, subsidized premium system will represent a net cost reduction for the U.S. government. On Medicare, most health care analysts agree that cuts to reimbursement rates and a shift to payment for health outcomes will help cut costs.

Further, businesses would be required to offer insurance or pay a percent of their payroll cost to the federal government to help offset the U.S. government’s cost for subsidizing health insurance for the poor/working poor. (Some small business may be accessed a lower fee for non-insurance of employees.)

Finally, the net cost of the above, if passed into law? The proposed changes still would reduce the deficit by at least $40 billion over 10 years, but the key point there is that health care reform not increase the deficit. President Obama has repeatedly said he will not sign a health care reform bill that increases the deficit, and so far, Congressional lawmakers are on-track to produce a deficit-neutral bill, according to an analysis by the Congressional Budget Office.

Hence, if the health care reform bill as currently comprised passed and were signed into law by President Obama, it would insure some of the uninsured immediately, and the remainder over time; and re-structure the health care system and move the nation away the unsustainable emergency room treatment pattern. It would also decrease health care costs, including Medicare and Medicaid cost containment. The bill would not insure everyone immediately, as liberals Democrats want, nor would it leave every health care decision for the uninsured up to the private sector, as conservative Republicans want. In sum, the bill would incrementally move the United States toward a health care system where everyone is insured. That doesn’t sound like much, but given Congress’ polarized, partisan politics-dominated condition – one where deep philosophical differences exist between the Democratic and Republican parties - that’s about the best the nation can hope for at the current time.

Could the U.S. experience a strong economic recovery?

2009-09-28T04:00:00.001-04:00

By Money Matters Editors

Can one make the case that the U.S. economic recovery will be stronger than expected? Hey, it’s a dirty job, but somebody has to do it.

Here’s why the U.S. economy might register stronger GDP growth in the initial stage of the recovery:

First, there’s the manufacturing sector. The Institute for Supply Management’s manufacturing index rose to 52.9 in August from 48.9 in July. Readings above 50 indicate an economic expansion; under 50, a contraction, but the important point is that businesses have cut inventories for 40 straight months.

The significance? Companies and manufacturers have become super-lean: along with cutting costs, they’ve been unwilling to store products, for fear of being left with goods they can’t sell, in the event the longest U.S. recession since the end of World War II continues through the fall and into winter. However, those super-lean inventories mean many corporations will be ‘product-short’ if the economic recovery takes hold, requiring them to hire to increase production and rebuild inventories. If that occurs, U.S. GDP will benefit from the increased purchasing poer and additional commerce.

Second, GDP growth in emerging market giants China and India has already accelerated quicker than many economists had forecast. If demand in the east, along with Latin American and Europe demand, is sustained, that would boost global trade, and the U.S. economy would receive a modest tailwind.

Third, fiscal stimulus money will continue to work its way into the U.S. economy, including money for infrastructure projects, and aid to state social services. Only about 30-35 percent of the fiscal stimulus package has been targeted for 2009 – hence, expect a decent-sized tailwind from federal spending in 2010.

Finally, there’s the impact of the pronounced recession itself. Historically, every time the United States experienced a deep recession in the modern era, 1953-54, 1957-58, 1973-75, and 1981-1982, U.S. GDP increased at better than 6 percent during the recovery’s first year. Following the Great Depression's initial period, 1929-33, the economy snapped-back with 10.8 percent growth (although it slumped again in 1937 before recovery following the start of World War II in 1941). Hence, if the historical norm of severe recession/stronger recovery holds, U.S. GDP growth should be better than adequate in the recovery’s initial stage.

Only modest GDP growth seen for 2010

So why then, given the above (lean inventories, emerging market growth, fiscal stimulus, historical precedent) do most economic forecasts expect only sluggish-to-moderate GDP growth as the recovery takes hold?

The major reason is concern about U.S. consumer spending. Americans have increased their saving rate to about 5 percent, while simultaneously cutting back their spending. If the ‘frugal consumer’ era continues, it’s highly unlikely that consumer spending will account for 60-65 percent of U.S. GDP that it has historically. For the above reason, a sustained consumer pull-back almost guarantees lower U.S. GDP growth. Put another way, a high GDP growth economy is dependent on high levels of consumption. Take a portion of that spending away, and there’s less commerce to go around at the retail end.

Over time, the U.S. economy can adjust to one in which the consumer does not account for as much of GDP as is it has historically. It can become a more ‘quality-of-life’ oriented economy, but there will be distinct sector losers (including the retail, restaurant, and apparel sectors), with considerable dislocation. And it’s that dislocation, and its impact on future job growth that has led many economists to expect a weak economic recovery as it pulls out of the current recession.

For prospective U.S. home buyers, time is on your side, yes it is

2009-09-25T04:00:00.003-04:00

By Money Matters Editors

Some economists and realtors are forecasting a quick snap-back in the U.S. housing sector. Nope. Sorry, it doesn’t work that way, as the grade school kids say in the states. Here’s why:

First, there’s the inventory bulge from the housing sector’s bust. As the National Association of Realtors’ August existing home sales report released Thursday indicated, there’s still an 8.5-month supply of existing homes on the market in the United States at the current sales pace.

True, that total is down from the 9.3-month supply level of July, but it’s still well above the inventory level during typical conditions: a normal, healthy housing market has a 3-5 month supply of existing homes.

Institutional investors, the big guns who make markets, follow several housing statistics (and other stats), but they closely monitor existing home sales data because they constitute the bulk of home sales. Moreover, because the housing sector affects so many lateral sectors (furniture, appliances, landscaping, insurance), housing, at least historically, has been a barometer of overall U.S. economic health.

Mortgage availability: still a concern

A second reason to not expect a quick snap-back in housing concerns mortgage availability. The liquidity crisis is over but the credit crunch is not. Banks/mortgage lenders are still not granting enough mortgages to good-credit, prospective home buyers. Less than three short years ago, a FICO credit score of 700, stable income, and a 10 percent down payment would qualify one for a 6.5 percent, 30-year, fixed-rate mortgage. Today, given the same factors, even a credit score of 750 (which is very good) will not guarantee one a mortgage.

A third factor concerns job growth. Historically, absent job growth, the home sale market struggles: actual household formation suffers, and those who already have a home and who would typically trade-up when needed, tend to wait until economic conditions improve. Currently, the U.S. economy, which has lost 7 million jobs during the pronounced recession, is still shedding about 200,000-250,000 jobs per month.

In sum, given the enormous supply of homes, the lack of buyers, and zero job growth, don’t look for a bottom in home prices in the short-term. The NAR said the national median existing-home price for all housing types was $177,700 in August, a decline of 12.5 percent from August 2008. Given current sales trends, it’s unlikely that home prices will bottom before the spring 2010, and probably for longer than that.

For investors, the above means a cautious stance is prudent concerning cyclical stock investments: protracted housing sector sluggish could create a double-dip recession.

For potential home buyers, the advice is obvious enough: time is on your side, yes it is, as Mick Jagger and The Rolling Stones sang. If you do not have to buy, prices are likely to be lower six months from now, in many U.S. metro areas.

Is the U.S. dollar about to plunge?

2009-09-24T04:00:00.004-04:00

By Money Matters Editors

Where’s the U.S. dollar headed from here? Well, if you’re in the camp that argues that both monetary and fiscal stimulus guarantee rising U.S. inflation, the dollar will likely weaken in the immediate quarters ahead, and probably for longer.

But if you’re in the camp that argues that given asset destruction, massive job lay-offs, and price power that is non-existent, the dollar will hold its own against the world’s other major currencies.

The dollar weakened about one-half cent Wednesday to $1.4811 and $1.6436 versus the euro and British pound, respectively. The dollar was virtually unchanged versus Japan’s yen at 91.13 yen. The dollar has weakened about 7 percent versus the euro and about 8.5 percent versus the pound so far in 2009. The buck is virtually unchanged versus the yen this year.

Autumn: season of decision for dollar?

Further, the autumn could prove to be ‘the season of decision’ for the dollar. The U.S.’s structural budget deficit – that’s the deficit that will likely exist whether the economy is in expansion or recession – is in the $300-350 billion range (including an expiration of the 2001 Bush tax cut), and that fact, combined with institutional investors re-evaluating portfolios as they return from summer vacations (when trading volumes are light) could result in institutions rotating out of dollar-based investments, weakening the dollar. That all-the-more underscores the need for the U.S. Congress to cut the budget deficit, and health care reform is a major factor in that effort, due to the projected increases in federal health care spending without health care reform.

Also, if serious deficit reduction doesn’t occur, and institutions start decreasing their dollar-denominated assets and dollar positions, emerging market giants China, India and Russia might combine with other large U.S. public debt holders Japan and Saudi Arabia and renew their effort to create an alternate global reserve currency – further weakening the dollar. Just as bad, any mass sale of U.S. government debt would increase interest rates in the U.S.- commercial and personal - presenting another hurdle to economic recover

One factor that could work in favor of the dollar? U.S. GDP growth. You read correctly: U.S. GDP growth. The currency market is starting to price-in capital flight from the U.S. to healthier emerging markets economies, particularly those in Asia, which are likely to register impressive growth rates as the global economic recovery takes hold. All other factors being equal, capital chases return, and most economic models show stronger GDP growth in Asia, not the U.S., in the recovery’s initial stage.

However, U.S. GDP growth could surprise. To be sure, no one expects the United States to return to Clinton administration-era, 300,000-job-gain months, but the recovery could be stronger than expected in Q3/Q4 2009 and Q1/Q2 2010, particularly if the housing sector snaps back quicker. And the latter scenario would be bullish for the dollar, leaving the dollar bears on the short end of a dollar-short stick.

What should investors monitor? Again, keep your eye on the U.S. budget deficit: any sign that Congress will not take the difficult but necessary steps to reduce it will likely weaken the dollar further. Also monitor the condition of major U.S. banks: any sign that some may need more public assistance (translation: taxpayer funds) to re-capitalize implies more government borrowing, which would also weigh on the buck.

Natural gas' U.S. prospects rise as its price falls

2009-09-23T04:00:00.002-04:00

By Money Matters Editors

A ‘perfect storm’ of new technology, producers’ reluctance to cut production, and a pricing anomaly has created a new opportunity for natural gas to emerge as a dominant energy source in the United States in the decades ahead. Here’s the low-down:

First, there’s natural gas’ low price. Natural gas hit a 7-year low earlier this year, falling through the psychologically-significant $3 per million BTUs (MMBtu) level on rising supplies and low demand from industry and power plants. Traders say prices could fall to $2.25-2.50 per million Btus before demand picks up, assuming the U.S. economy’s recovery track continues to progress. Natural gas is currently trading at about $3.65 per MMBtu.

Second, long-term, natural gas will likely at least remain competitive with oil, and probably remain cheaper on an energy delivered per dollar basis. The main reason? Large storage capacity in the United States, and the to-date unwillingness of natural gas producers to stop producing the stuff. New technology, including a process called hydraulic fracturing, enables the tapping of natural gas sources in the previously cost- prohibitive U.S. regions of Appalachia, the Mid-Continent, the Gulf Coast, and in the Rocky Mountains.

What’s more, estimated U.S. natural gas reserves have increased 35 percent, mostly on the ability to access those new sources, with estimated reserves totaling 2,074 trillion cubic feet in 2008, up from 1,532 trillion cubic feet in 2006, according to the Potential Gas Committee, The New York Times reported.

Third, the oil and natural gas, which compete with each other but which do not have identical customers or uses, are currently orbiting in different solar systems. Oil, currently trading about $71, oil is now about 20 times the price of natural gas, compared to a historical average of about 8.4 times natural gas over the past decade.

In addition, oil, meanwhile, for a variety of reasons, shows little sign of trending lower. Whether its oil-as-an-asset-play, the threat of inflation, a weakening dollar, OPEC production cuts, or the prospect of rising demand in emerging markets, oil has (so far) found a way to defy gravity and remain at a lofty $60-75 price, despite high inventories and the worst global recession since the end of World War II. Each week, another oil sector analysts says oil is overpriced and predicts a price collapse; but it doesn’t happen.

A new opportunity for natural gas?

The price disparity creates a new opportunity for natural gas to displace both oil and coal. Concerning transportation, more vehicles, especially fleets of buses, vans, and trucks could move toward natural gas-powered engines: a bill to increase tax incentives currently working its way through Congress would further encourage those conversions. Also, more homeowners are likely to convert heating systems to natural gas, if the price disparity continues.

Concerning electric power generation, coal is still considerably cheaper than natural gas for generating electricity, but new Congressional legislation to penalize carbon emissions will likely decrease that advantage: even in its cleanest form, coal is dirtier than natural gas, and natural gas has a lower impact on climate change.

Still, after price, perhaps natural gas’ most important selling point is its location: it’s a domestic energy source. The importance of that factor can not be underscored enough in a global economy that’s likely to experience competition for resources in the decades ahead, including key commodities. Unlike oil, the United State possesses ample amounts of conventional and unconventional natural gas. That means nearly 100 percent of the money needed to produce and use the energy source remains in the domestic U.S. economy – serving as a capital source for investment, and creating domestic jobs. Conversely, consumption of foreign oil results in the annual transfer of $250-$450 billion in U.S. wealth to foreign governments and suppliers - an energy habit that has also increased the U.S. trade deficit.

How significant is natural gas in the nation’s energy policy? Oil/energy analyst Daniel Yergin, co-founder of Cambridge Energy Research Associates, has called unconventional natural gas the biggest innovation in the energy business in the past 25-30 years.

It’s time for Congress to act: the nation should pass legislation that increases tax credits to speed the conversion of vehicle, residential, and commercial energy systems to natural gas. Currently, natural gas accounts for about 25 percent of the nation’s energy production, and 22 percent of electricity production. Natural gas is not without environmental concerns: it has a lower impact on climate change, not no impact, and some environmental groups are concerned that hydraulic fracturing will pollute drinking water sources.

Still, the advantages of natural gas - energy independence, enhanced foreign policy flexibility, ample reserves, wealth retained in the United States, more domestic jobs, a lower impact on climate change - tip the scale well in favor of a much bigger role for natural gas for the nation’s energy needs.

A savvy investment strategy for the next decade? Pay down your mortgage faster

2009-09-22T04:00:00.002-04:00

By Money Matters Editors

What’s the best investment strategy for the next decade? Well, that varies, depending on your risk tolerance, investment horizon, and investment goals, among other factors, but here’s a good investment tactic if you own a home in the U.S.: pay down your mortgage quicker.

That’s correct: paying down your mortgage quicker will help you achieve your financial goals.

Here’s how:

This decade, the Americans got into a lot of problematic - and in some cases very risky – habits/practices regarding debt. One of them was the now well-publicized teaser-rate mortgage, where borrowers were granted loans at very-low ‘temporary’ rates, even though, in some cases, the loan would become unaffordable for borrowers after the mortgage reset to its regular rate. The result was predictable: an increase in U.S. home foreclosures to record levels.

What’s more, there’s a variant of the above that Americans of conventional, fixed-rate mortgages probably don’t recognize, but it’s also problematic: paying the minimum on your mortgage.

Now don’t misunderstand: if you pay your mortgage on-time each month you’ll be in good graces with your bank/mortgage lender, and your credit score will not be affected.

A way to decrease total interest paid

The problem with above is that paying the minimum due each month on a 30-year, fixed-rate mortgage doesn’t reduce the debt really fast. It’s almost like paying the minimum due on a credit card: not the best way to reduce debt quickly.

With the above in mind, a home owner should try, where possible, to pay more than the minimum each month. The savings can be really substantial: truly eye-opening.

Here’s an example:

On a $200,000 fixed, 30-year mortgage at 6 percent that starts in September, the monthly payment is $1,199.10. You’ll pay $231,676 in interest in 30 years, in 2039.

But if you add just $100 per month to the monthly payment, you’ll pay just $182,537 in interest and the mortgage will be paid-off 6.5 years earlier, in 2034!

Add $200 per month, and you’ll pay just $151,875 – or about $80,000 in interest saved – and the mortgage will be paid-off 9 years earlier, in August 2030!

The advantages of paying more than the minimum on your mortgage may not be obvious to all investors. You’re not only staying in good graces with the bank/lender, you’re building equity much quicker – that’s always a good thing when you own residential real estate. Second, that extra $80,000 in interest saved may not seem like much while you’re making the extra payments, but it will when your mortgage is paid in full, 9 years ahead of time.

Paying more than the minimum is also a statement to the bank/lender that you far exceed the minimum debt servicing requirement. And when you think about it, that’s a good practice for individuals, corporations, and the nation.

Americans: Save, but not too much

2009-09-21T04:30:00.009-04:00

By Money Matters Editors

This is not a polemic against saving. Americans – and others for that matter, but especially Americans – need to save. And how.

A decade of unsustainable over-consumption fueled by home equity loans and refinancings has left the United States with too little saved.

Americans reversed the above trend during the recession, with the nation’s savings rate rising to about 5 percent of gross income.

The paradox of thrift

But now there’s an equally difficult problem: the U.S. is saving too much, all at once. The great economist John Maynard Keynes said saving is a good thing, but if everyone saved everything, all the time, it would be a disaster. Keynes called it the ‘paradox of thrift.’

That’s because some consumer spending is needed to stimulate the U.S. economy. In fact, in recent decades consumer spending has accounted for 60-65 percent of U.S. GDP, and in some years the figure was closer to 70 percent. During the recession the U.S. has entered the ‘frugal consumer’ era and it remains to be seen whether consumption will account for as much of GDP as it has in the past, but one constant remains: some consumer spending must occur for U.S. GDP growth to approach historical rates.

But will it occur? We’re still too early in the post-financial crisis age to know if consumer spending will approach previous levels, but the early indicators suggest that it will not. And, similarly, the early data suggests Americans will continue to save at least 5 percent of gross income. If anything, they might save even more, in order to rebuild nest eggs and make-up for asset destruction in the housing and stock markets.

If that occurs, it will almost guarantee lower GDP growth than would typically occur in the U.S. economy following a recession, and it’s an inevitable consequence of a society that amassed too much debt in all spheres (individual, corporate, government) this decade. In other words, there are just so many dollars in an economy and it appears dollars deployed can achieve an impressive rate of savings or consumer spending, but not both.

How will the U.S. emerge from the above quandary? Well, after awhile the United States will have amassed enough savings and capital such that high spending won’t represent as large an opportunity cost: American citizens will have saved enough to meet future life goals. But economists say that day is 5-7 years off.

In the meantime, the danger of Keynes’ ‘paradox of thrift’ exists. Hence, the adage here is: if you over-consumed this decade, and need to increase your savings, then do save. However, if your financial status is strong, you have little debt, and you can afford to spend a little, then spend a little.

Welcome to Money Matters

2009-09-20T20:29:00.000-04:00

President Obama: As American as apple pie

2009-09-19T03:30:00.002-04:00

By Money Matters Editors

There’s been a great deal of banter, and, frankly, static and hysteria, concerning President Obama’s economic policies. The most-vocal critics, really a fringe of the American voting public, assert that Obama is ‘a socialist.’ Nothing could be further from the truth: Obama believes in corporate capitalism, and fits into the tradition of a long-line of American reformers who are capitalists.

Europe looks at America with amusement: how can a President who ardently believes in the private sector’s virtues (entrepreneurship, ingenuity/innovation, dynamism, a more-efficient use of resources, reward for work, wealth building, and job creation, among others), and whose systemic reforms largely rely on the private sector, be viewed as a socialist?

Philistines, obstructionists, or both?

The reason is based in the United States’ political culture, which is 1) very private sector-oriented, and contains 2) the fear of a strong central government. There is a long history in the U.S. of autonomically - and in some cases mindlessly - opposing any economic/social reform. President Franklin D. Roosevelt (FDR), a liberal, was called a socialist during the debate over Social Security, the now bedrock pension system for most Americans. (Try opposing Social Security now, and see what happens to you, politically.) President Harry S Truman, an ideological moderate, was called ‘a traitor’ for taking, in the interpretation of the extreme ideological right, too weak a stance versus the Soviet Union and communism in the 1940s after World War II. President Lyndon B. Johnson was called a socialist during the successful effort to pass Medicare, the popular health insurance program for senior citizens. In short, any time an American president attempts economic / social reform, the fringe right wing goes into overdrive: it’s opposed to nearly all government programs, except defense.

But the extreme right’s fears of ‘big government’ are not just rooted in the American culture. They also stem from ignorance: they equate socialism with Soviet gulags, human rights abuses, and totalitarian governments. Many in the extreme right don’t know what a social democracy is – they can’t imagine how someone can be a social reformer, or even a socialist, and still favor democracy. They either have little knowledge of, or choose not to learn about the social democracies of Sweden, Finland, Norway, France, and Germany etc. Nor do they have substantial knowledge of the broad, enlightened – and more humane – public policies these nations have. The extreme right is against any social reform involving government, even those that lead to humane, smart, and more-just social conditions.

The extreme right favors limited government with small local governments, and almost as small state governments, and not much more. Of course, there’s nothing wrong with advocating for limit government – who wants excessive government? - but what they fail to understand is that the limited government system they seek is grossly inadequate to meet the problems of a modern, complex, industrial society. That reality has never deterred the extreme right: they’ve largely ignored the economic reality around them since FDR’s presidency, and probably for much longer than that. Further, their extreme views – and in some cases truly ludicrous ideas – today are perhaps triggered by the fact that, as a political bloc, their power is getting smaller and smaller. As evidenced by the 2006 and 2008 elections, more and more Americans know that the state can play a positive role in society, along side a dynamic private sector. Most Americans now realize that market absolutism - the belief that markets can do no wrong and are self-policing and self-correcting - has been discredited every bit as much as orthodox communism. The extreme right argues that the American people will swing back over to them, given more time, but the long-term trend does not look good: the financial crisis demonstrated the folly of market absolutism, and this is an age that has incontrovertibly required and will continue to require collective action. That's something that just doesn’t register with the extreme right: it probably never will.

The above infuriates the extreme right. Add the racist views by some elements in the extreme right – but by no means all members – and conservative, national, political commentators on t.v. and radio who use demagoguery and half-truths, and who play to the fears of these often ill-informed Americans, all with the goal of stalling any social reform that involves government, and you can see why they are quick to brandish any former as ‘a socialist.’

But know that President Obama, like FDR, Truman, LBJ, and Bill Clinton before him, are as corporate capitalist American as any CEO of a Fortune 500 company. And you don’t have to live in Europe for two years to understand that.

On U.S. health care reform, half-loaf may be all that's possible

2009-09-18T04:00:00.013-04:00

By Money Matters Editors

Our friends in Europe, and our friends in Asia, too, sometimes must look at the United States and simply shake their heads in amusement.

The U.S. Congress – specifically a Senate panel with 3 Democrats and 3 Republicans – has just spent nine months negotiating a health care reform bill, and at the end of all their work, do know what the end result was?

A bill that no one likes, The New York Times reported. Unbelievable. U.S. Finance Committee Chairman Max Baucus’, D-Montana, backroom wheeling and dealing, compromising, and logrolling has resulted in a bill that many liberal Democrats are saying they can’t support because it doesn’t contain a public option, and one that conservative Republicans are saying still does not represent an affordable health care bill, nor one they can support. All of Baucus’ work and delays did not garner one vote from Republicans on the committee. Talk about spinning your wheels.

Smoke-filled rooms, but no agreement

Further, Baucus’ bill represents a bona-fide compromise: Baucus’s bill will still leave 18 million American citizens uninsured. At least 45 million people living now in the U.S. are without health insurance. It’s also the least expensive bill proposed so far - $774 billion - paid for by new taxes and fees, and by savings from Medicare. If passed, it would reduce the federal budget deficit by $49 billion for the next 10 years, according a Congressional Budget Office analysis, The Times reported.

But the bill appears to be dead-on-arrival, as they say for bills lacking substantial floor support as they work their way to a legislative chamber. Or at least it’s a bill that will be modified substantially on the Hill.

At this juncture, the health care reform bill appears to be a struggle between: 1) President Obama’s centrist tendencies – he apparently is willing to cut a deal, i.e. ‘settle for a half loaf of bread’ – in order to maintain support among moderate Democratic voters and Independents; and 2) liberal House Democrats, who apparently are determined to require a health care reform bill with a public option. There’s a strong probability liberal House Democrats won’t vote for a reform bill without a public option.

Meanwhile, don’t count on any House Republicans voting for the current bill. Will they vote for any bill? It’s hard to say: their stance to-date has been “every plan costs too much.” And Senate Republicans? The Obama administration will be lucky if the ultimate legislation garners 4-5 Republican Senators.

In the end, as is so often the case with major legislation in Washington, a simple majority is not big enough to enact substantive change (examples: Social Security, Medicare). For seminal, era-changing legislation, you need a supermajority - above 70% support. And with about 35-40 percent of the nation opposing the bill, it appears the Obama administration will have to compromise, and hope they can retain the support of enough liberal House Democrats, in order to get a health care reform bill passed this year. The political reality suggests liberal Democrats, along with President Obama, will have to settle for a half-loaf.

Can the U.S. economy adjust to globalization?

2009-09-17T04:00:00.003-04:00

By Money Matters Editors

It is not, to put it diplomatically, a stellar time for the U.S. economy.

The unemployment rate is approaching 10 percent, and most economists would be very happy if it stopped rising at that level. Home foreclosures hit a record during this recession, and while not rising, are still way too high for economic health. And, of course, the manufacturing, business investment, and export sectors, while having recently displayed signs of stabilization, are not, in recovery-mode yet. And the U.S. consumer, after a decade of over-consumption, is saving like never before – a 5 percent annual rate – good for investment, long-term, but a depressor of GDP growth, short-term. In other words, all the key sources of demand are stagnant or barely growing – not nearly the conditions for robust GDP growth that one typically sees during the initial stage of an economic recovery.

The above is not a prescription for a robust U.S. recovery. Then what will turn it all around? What will get the ball moving in the correct direction, or ‘get this economy moving again,’ as President John F. Kennedy said in 1961.

The answer may be, ironically, the American economic system itself. In other words, the U.S. economy's ability to adapt, to innovate, and to renew itself may be the grease that gets the gears in motion, to use a machinery metaphor.

What will be the new growth engines?

The $64,000 question – or in this case the $14 trillion question, given the size of the U.S. economy – is what sector(s) will form the basis for this renewal his American economy in the new era? You can scan the dozens of research reports and economic forecast, as the we, as Money Matters has, and obtain dozens of answers. The reality, at this juncture, is that no one really knows what new sectors will serve as the engines of growth for the U.S. economy.

Without question, though, those new sectors have to offset the millions of manufacturing jobs and industrial output lost to globalization for the United States to remain a strong, versatile, and prosperous nation with ample economic opportunities, and sustainable GDP growth.

Further, given the ‘frugal consumer’ era in which Americans continue to belt-tighten and save to make up for a decade of over-consumption, the economy may become more quality-of-life oriented and less consumption-oriented. (Consumption currently accounts for about 60-65 percent of U.S. GDP.)

Here are the strong candidates for engine of growth status: health care services, information technology, infrastructure, education, renewable energy, biotechnology, and high-end/technology-intensive manufacturing.

Of the above, high-end/technology-intensive manufacturing looks especially promise. China, low cost producer to the world, will continue to dominate the low-end manufacturing realm – which includes everything from cheap clothes to toy stuffed animals for children.

But high-end/tech-intensive manufacturing may become the U.S.’s forte: the sector would include solar panels for homes, to next-generation commercial jet (Boeing’s 787), to smart cooling/heating systems for your home, to high-mileage green cars, to wind mills.

The above is not to dismiss the enormous hurdle that globalization presents: the U.S. economy is being tested as international business competitors enter almost every space. Moreover, it is too soon to predict which sectors will be the clear winners or even how many winner sectors the U.S. will have in the new era or during the economic period known as the ‘new normal’ of lower slower economic growth, less consumption, and increased government regulation. But there’s reason to believe the U.S. will discover/identify at least a few, to remain a major player on the international stage. That may seem overly optimistic, given the current condition of the U.S. economy, but a review of history will show it’s not: the United States has overcome bigger hurdles in the past.

Dow jumps, but recession continues: what's going on here?

2009-09-16T04:30:00.002-04:00

By Money Matters Editors

Some investors, particularly those new to investing in stocks, are bewildered by the stock market’s ability to rise, even while the economy is still in recession, with high unemployment.

The reason has to do with how institutional investors – the players who move the market operate. Institutional investors (IIs) are always looking ahead, or ‘down the field,’ to borrow a U.S. football analogy.

Typically, IIs are reviewing currently data, comparing to forecasts, then they make an assessment of the condition they think the economy will be 6-9 months into the future. If they believe economic conditions will improve, and corporate revenue and earnings will rise, they bid stocks up, and the market rises; worse, they sell stocks, and the market declines.

The Dow: a leading economic indicator

In other words, the Dow is a lead indicator: it’s a reflection not of current economic conditions, but what IIs think economic conditions will be 6-9 months ahead. And that’s why one can have the Dow rise 1,000 or even 2,000 points before the economic recovery takes hold and typical investors see manifestations of it in higher revenue and earnings.

That’s what occurred during the Dow’s spring/summer rally, when it rose from about 6,500 to about 9,683 Tuesday, in mid-September: based on an evaluation of economic data and other metrics, IIs believe the U.S. economy will be in recovery – in better shape – in March 2010 or June 2010 than it is today, and they’ve bid up prices.

Do IIs always get it right? No, sometimes unpredictable events intervene, and some times they just get it wrong. But more often than not, IIs are correct, and if you, the typical investor wants to profit along with them, you have to be in stocks when they are adding to their positions. No one ever made a dime investing in stocks by waiting until conditions were 99% safe: if you wait until then, almost all stocks will have been bid-up in price, and there will be few bargains.

Hence, the time to invest in stocks is now, if one expects to earn outsized gains during the next economic expansion. Incrementally add to positions of quality companies and establish new positions in the same where you haven’t previously.

U.S. worker productivity continues to increase

2009-09-15T04:00:00.010-04:00

By Money Matters Editors

An experienced economist will tell you that for almost every economic statistic there’s an upside…and a downside.

And that’s perhaps no truer than with U.S. worker productivity. Another way of putting this is, to paraphrase the great writer Charles Dickens, ‘It is the best of times, and the worst of times for the American employee.’

The best of times: In Q2, the American worker, already the most productive in the developed world, became even more productive, with U.S. worker productivity increasing at a 6.6 percent annual rate – a six-year high, according to the U.S. Labor Department. During the quarter, hourly compensation rose just 0.2 percent, with unit labor costs – a key indicator of inflationary pressure, and one watched closely by the U.S. Federal Reserve – plunging 5.8 percent – its largest decline in nine years. In other words, American employees are more productive now – on an output per unit cost basis – that any time in the modern era.

What's more, in the past year, productivity is up 1.8 percent, while unit labor costs have dropped 0.6 percent.

The above productivity statistics, in and of themselves, are the stuff of a movie marquee – a major economic accomplishment. But the above comes on the heels of three decades of increasing worker productivity – including the super-productivity era of the Roaring 1990s.

For those investors less familiar with the statistic, productivity measures output per hour worked. Economists say rising productivity usually leads to increases in income, as businesses can increase salaries/wages paid without increasing their per unit costs. While quarterly productivity statistics are important, most economists focus on the longer, 12-month trend, as it’s more indicative of overall efficiency and output strength. Moreover, the increased productivity in the past 12 months is a major reason why so many S& P 500 companies were able to exceed earnings estimates in Q2.

U.S. productivity averaged about 2.7 percent during the 1948-1970 period, then slumped to 1.6 percent in 1971-1995. However, starting in 1995 the technology revolution driven by the personal computer, microprocessor, and the Internet, among other breakthroughs, propelled a large increase in productivity to about 2.5 percent per year. The remarkable productivity rate helped create the record earnings and rising real, median incomes that characterized the “Roaring 90s,” so says economist Peter Dawson.

The worst of times: Now, investors may legitimately ask – what could possibly be bad about large increases in worker productivity? In the aggregate, or looking at ‘the big picture’ – nothing: strong economies and nations continually increase productivity.

The problem occurs at the individual level: short-term, it reduces the pool of jobs available in the economy. Add a cyclical down turn (lay-offs), and structural changes in the U.S. economy prompted by globalization (the transfer of jobs to lower-cost production centers overseas), and the result is? You guest it – a severe shortage of jobs in the U.S. economy. Right now, the U.S. economy is short about 12-14 million jobs, depending the methodology one uses.

Further, most investors know what a shortage of jobs leads to: high unemployment, (currently 9.7 percent in the U.S.) and, as the above Labor Department data indicates, little bargaining power for a wage increase for workers in many job categories. And we know that when wages don’t rise or if they fail to keep pace with inflation, consumer spending lags, and that’s exactly what has happened in this recession. (The increased U.S. savings rate during the recession has also put a lid on consumer spending.)

So while long-term increased productivity is good and essential, short-term it does have a down side.

Economic Analysis: So what’s the solution to productivity’s two-edged sword? In the past it has always been the U.S. economy’s remarkable ability to adapt, to renew and reinvent itself – to discover/identify new sectors of growth that create jobs.

And that’s what must occur in the quarters and years ahead - the discovery of new engines of growth - for the United States to remain a strong, versatile, and prosperous nation with ample economic opportunities.

Obama administration slaps a tire tariff on China: terrific or terrible idea?

2009-09-14T04:30:00.023-04:00

By Money Matters Editors

Some say the new U.S. tariff on China’s tires will be terrific while others say it will be terrible. What’s going on here?

The Obama administration has imposed a 35 percent / 30 percent / 25 percent, 3-year tariff on passenger vehicle and light truck tires from China, arguing that China’s current monetary and economic policies ‘artificially depress’ the cost of China-made tires exported to the U.S., hurting U.S. tire manufacturer sales, resulting in lost jobs. China’s share of the U.S. tire market has risen to 16.7 percent in 2008 from 4.7 percent in 2004.

China, conversely, says it’s doing nothing wrong and will defend its position. China also accused the U.S. of protectionism, or establishing a tax designed to restrict imports into the U.S. “The Chinese government will continue to uphold the legitimate interests of China's domestic industry and has the right to take corresponding measures," Chen Deming, China’s minister of commerce, told the Associated Press.

President Obama’s political base includes organized labor, and Obama was under pressure to impose a tariff from the United Steelworkers union. The union, which represents about 30,000 tire production workers, had filed a complaint with U.S. International Trade Commission.

Tariffs: anti-globalization?

Critics charge the U.S. tariff goes against the natural process of globalization, whereby production is transferred from higher-cost production regions to lower-costs production centers, such as China. Millions of manufacturing jobs in the U.S., in Europe, and in other developed nations have been transferred to China and other lower-cost nations as these nations built plants and connected to global markets for trade. These critics also say that, in addition to increasing inefficiency and keeping tire manufacturing costs high, tariffs will hurt trade, particular if China responds with its own tariffs and a trade war breaks out.

Union leaders and others who support the tariff argue that there’s little that’s fair about China’s trade policy. They argue China’s fixed-rate currency, the yuan, which presently trades at about 6.82 yuan to the dollar, artificially depresses the cost of Chinese tires and other Chinese-made goods: they say China has kept the yuan weak in order to keep the price of its exports below its competitors abroad, in order to grab market share. Economist David H. Wang, a China expert, says the yuan would quickly appreciate to about 4 yuan to the dollar, or strengthen even more - instantaneously increasing the price of China’s exports - if China didn’t artificially weaken it.

“China’s decision to keep the yuan lower is a strategic decision designed to undercut competitors. It is a form of a trade war in itself, although China would not characterize as that,” Wang said. Wang added that he doesn’t want to see tariffs become the norm, as they would hurt already weak international trade, “but the United States had to do something to put China on notice that they have to eventually allow the yuan to appreciate.”

Economic Analysis: Will a trade war ensue between these two economic giants? Probably not. Trade between the U.S. and China is too big to allow the tire tariff to spark a retaliation by China, such as dumping some of the massive amount of U.S. debt they own.

The Bottom Line for investors? Investors should view this as the first volley in the Obama administration’s effort to get China to let the yuan float – something that would lead to its export prices rising to true cost levels. The present fixed-yuan framework is unsustainable because it’s simultaneously flooding the market with too many cheap goods and increasing China’s inflation rate. True, as a creditor nation, China has leverage versus the U.S., but the reverse also is true: if China does not reform its system, and end its ‘monetary mercantilism,’ it risks jeopardizing an economic relationship with the U.S. – one that’s critical for China’s economic growth.

Welcome to Money Matters

2009-09-12T19:12:00.002-04:00

At equilibrium, the political support for health care reform exists

2009-09-12T00:24:00.003-04:00

By Money Matters Editors

Political scientists and public policy types have this phrase they use to describe the temperature for public policy during normal times: ‘at equilibrium.’

Ignoring for the moment that nothing economic or political since the onset of the financial crisis can be considered ‘at equilibrium,’ the phrase describes a political condition on the ground in Washington when there isn’t a crisis, a gaff, a major mistake, an international event, a point of fear/hysteria, or some other idiosyncratic event that can hinder (or help) a policy's chance for passage. And in case one hasn’t noticed, there are a lot events that can distort equilibrium in Washington, and the health care reform debate is a good case study.

The long, slow journey of politics, and progress

Every few days of so, it seems, there’s a new scare tactic data point to distort equilibrium, enabling an extremely conservative segment of the U.S. electorate – and a decided minority of voters – to present road blocks to health care reform. Examples include: ‘death panels,’ ‘pulling the plug on grandma,’ and alleged ‘Medicare rationing.’

But lately there’s been a growing sense in Washington that despite the above, when the political climate reverts back to the mean – and is ‘at equilibrium’ – lawmakers sense a strong support for health care reform in the nation: it exists and is palpable.

A veteran, Washington, D.C.-based public policy colleague and friend of this Money Matters Editor on Friday said he believes the broad health care coalition senses it, too.

Of course, that’s not to say that Representatives and Senator can’t chicken-out at the last minute: that’s always a risk, but the point here is that support for health care reform is strong, and that “there’s an 80-90% of era-changing legislation being passed this year,” he said.

Remembering And Honoring The Victims Of September 11, 2001

2009-09-11T08:30:00.016-04:00

By Money Matters Editors

On this day we remember and honor the 2,998 persons whose lives were taken away from them during the terrorist attack on New York’s World Trade Center, the United States Pentagon, and on a plane that crashed in Shanksville, Pennsylvania eight years ago, on September 11, 2001.

Across the United States, and in communities round the world that also love freedom and democracy, citizens will take time to attend services to remember all who perished on that New Day of Infamy. We mourn the loss of their lives, and our prayers and thoughts are with their families and friends. In the words of Mr. Lincoln, it is altogether fitting and proper that we should do this.

But let us also, re-quoting Mr. Lincoln, continue with the great struggle of our epoch, and in doing so each day honor those who perished. Let us bring to justice every last remnant of the perpetrators of this act of intrinsic evil, and the tyrannical cult that supports it - so that liberty and democracy can flourish and so that government of the people, by the people, for the people, reigns victorious across the Earth.

The Dow is rising, but robust U.S. growth is not here: what's going on?

2009-09-11T07:00:00.026-04:00

By Money Matters Editors

Some investors, particularly those new to investing in stocks, are bewildered by the U.S. stock market’s ability to rise, even while the U.S. economy is still in recession, with high unemployment.

The reason has to do with how institutional investors – the players who move the market - operate. Institutional investors (IIs) are always looking ahead, or ‘down the field,’ to borrow a U.S. football analogy.

Typically, IIs are reviewing currently data, compare it to forecasts, then they make an assessment of the condition they think the economy will be 6-9 months into the future. If they believe economic conditions will improve, and corporate revenue and earnings will rise, they bid stocks up, and the market rises; worse, they sell stocks, and the market declines.

The Dow: a leading economic indicator

In other words, the Dow is a leading indicator: it’s a reflection not of current economic conditions, but what IIs think economic conditions will be 6-9 months ahead. And that’s why one can have the Dow rise 1,000 or even 2,000 points before the economic recovery takes hold and typical investors see manifestations of the better times in higher corporate revenue and earnings.

That’s what occurred during the Dow’s spring/summer rally, when it rose from about 6,500 to about 9,600 today, in early September. Based on an evaluation of economic data and other metrics, IIs believe the U.S. economy will be in recovery – in better shape – in March 2010 or June 2010 than it is today, and they’ve bid up prices.

Do the IIs always get it right? No, sometimes unpredictable events intervene, and some times they just get it wrong. But more often than not, IIs are correct, and if you, the typical investor, wants to profit along with them, you have to be in stocks when they are adding to their positions. As the Street adage goes, 'No one ever made a dime investing in stocks by waiting until conditions were 99% safe.' If you wait until then, almost all stocks will have been bid-up in price, and there will be few bargains.

Hence, the time to invest in stocks is now, if one expects to earn outsized gains during the next economic expansion. Establish or incrementally add to positions in quality companies.

(Money Matters will begin publishing Stock Reviews on Monday, September 14, 2009.)

Obama's speech reinvigorates health care debate

2009-09-10T18:36:00.004-04:00

By Money Matters Editors

President Barack Obama, D-Illinois, did indeed restructure the debate Wednesday on health care reform, in a substantive, succinct, upbeat speech that could very well lead to solving one of the biggest economic problems facing the nation.

Obama’s task now is to: 1) lure House Democrats without losing Senate Democrats on concerns that a possible public option will be too expensive, and 2) lure Senate Democrats, without losing House Democrats on concern that the new health care program will not incorporate as many working uninsured poor individuals and families soon enough. If Obama garners one or two Republican Senate votes for the administration’s reform package, that would be a major victory. Don’t look for any House Republicans to support any reform legislation: if the Republican Party is ‘the party of no,’ the House Republicans are 'the captains.'

Obama’s plan would cost about $900 billion over 10 years, but most of that total would be paid for by savings found by making existing Medicare, Medicaid, and related programs more efficient. The plan may also include a tax on insurance companies for so-called 'gold-plate insurance plans,' and a provision that requires the U.S. government to come forward with additional spending cuts, if the savings projected do not materialize.

Wall Street’s response to the above? Well, three’s not a direct correlation between the Dow and presidential speeches but the Dow did finish 80 points higher to close at 9,627. Institutional investors – in particular bond market participants – are taking a wait-and-see stance: they want health care costs lowered, but they’ll believe everyone can be insured without too much added expense only after reviewing the details of the legislation that passes and is signed into law.

Obama speech Wednesday will attempt to jump-start health care reform

2009-09-09T18:39:00.001-04:00

By Money Matters Editors

Wednesday night, President Barack Obama, D-Illinois, will try to right the U.S.’s ship of state in a speech before a joint session of Congress on health care.

The administration’s initial strategy - to lay low, and let Congress fill-in the details - has been a major disappointment for backers of health care reform, as it let opponents structure the debate on the issue. The result was gross distortion of the impact of health care reform legislation, confusion, and a mockery of the public discussion process called town hall ‘debates.’

Tonight, Obama has to re-energize his plan by outlining his goals, which will likely include: 1) a plan to subsidize care for those uninsured who can’t afford to pay for insurance, 2) a strategy to lower costs throughout the system, especially Medicare and Medicaid, 3) a viable way to pay for the costs of the new health care spending likely to ensue.

What’s Wall Street hoping for? The street doesn’t want another government spending program, but neither does it want to see a continuance of the current untenable health care system - one where 47 million Americans are uninsured and where millions of uninsured seek health care at hospital emergency rooms at $1,000 an hour and up, at the taxpayer’s expense. For the latter reason alone, the current system is fiscally and economically irrational and untenable.

Is a tax increase likely to be part of President Obama’s proposal? Probably, and while it’s not preferred by investors, they would probably accept that over another idea that was making the rounds Wednesday, a transaction tax on each stock trade. There was chatter in the Concrete Canyon that the fee could raise as much $50-70 billion per year to pay for health care. The street is hoping it can avoid the tax, and it’s also hoping that Obama offers a plan that lowers per person health care costs in the U.S. - perhaps the biggest factor in achieving the goal of universal health insurance.

Oil surges to $71 on OPEC meeting, weaker dollar

2009-09-08T18:05:00.004-04:00

By Money Matters Editors

It didn’t take much to reverse the trend in oil prices.

One weekend after crude slide below $70 amid renewed talk of a glut of supply, oil reversed and raced ahead $3.08 to close at $71.08 per barrel Tuesday.

Tuesday’s culprit? The weaker dollar and the belief that OPEC, which meets this week in Vienna, will maintain current oil production quotas.

Institutional investors view current production quotas as bullish for oil, as they have already discounted rising demand on the U.S./global economic recoveries, and rising demand amid unchanged production sends oil in a vertical direction.

The dollar drives oil higher, again

As noted, the weaker dollar played a role as well, with chatter in currency trader circles arguing that the dollar may end up bearing the brunt of the Obama administration's effort to stabilize the financial system and jump-start the economy. Traders say: 1) there’s little room to increase an already large U.S. budget deficit - hence that leaves out fiscal policy; 2) a tax increase in not likely to close the deficit; and 3) that leaves monetary policy - including the U.S. Federal Reserve’s quantitative easing - to bear the bulk of the stimulus work. Traders say if the Fed withdraws its quantitative easing over time, that will support the dollar, but until the Fed does, traders will assume more dollars are in circulation, and they'll drive the dollar lower, accordingly. Moreover, because oil is priced in dollars, crude tends to rise when the dollar falls; some institutional investors also buy oil as an inflation hedge, and as an asset play when stock markets are sluggish.

Meanwhile, the oil bears still argue that oil will head lower, due to plentiful supplies. One has to admire the persistence and bravery of the oil bears, if not their bottom line. The fundamentals certainly show inventories in the U.S. at 3-year highs, but more than one oil trader has lost his or her shirt shorting oil. Oil remains a market that’s disconnected from supply and demand fundamentals, which is why one should be careful before taking any investing position that assumes a lower oil price in the year ahead.

For U.S., natural gas is an alternative energy source for the next decade

2009-09-04T00:04:00.005-04:00

By Money Matters Editors

What to make of natural gas? Well, if the United States is smart it will ‘make’ something of it, soon, as in making it a major energy source for at least the next decade, and perhaps for longer.

And the reasons are obvious enough: driven in part by a new technology called hydraulic fracturing, estimated U.S. natural gas reserves have increased 35 percent, mostly on the ability to access new or ‘unconventional’ gas sources, with estimated reserves totaling 2,074 trillion cubic feet in 2008, up from 1,532 trillion cubic feet in 2006, according to the Potential Gas Committee, The New York Times reported.

The technology is enabling exploration and extraction of natural gas in previously cost-prohibitive U.S. regions in Appalachia, the Mid-Continent, the Gulf Coast, and in the Rocky Mountains.

The new technology, plus producers’ reluctance to cut production, are two reasons natural gas is trading at 7-year-low prices, falling through the psychologically-significant $3 per million BTUs (MMBTUs) level. Further, traders say prices could fall to $2.25-2.50 per million Btus before demand picks up, assuming the U.S. economy’s recovery track continues to progress this fall. Natural gas traded Thursday down 18 cents to $2.53 per MMBTUs.

Natural gas beating oil on price

Further, with a price around $68 per barrel, oil is about 27 times the price of natural gas, compared to a historical average of about 8.4 times natural gas over the past decade. Traders say that gap will likely shrink as natural gas use increases, but natural gas’ price advantage on a dollar per energy unit delivered basis, will persist, assuming historical global oil demand growth during economic expansions.

The above more than tips the scale in favor of increased use of natural gas, where possible, across the U.S. energy platform: homes, businesses, electric power plants, and vehicle fleets. Currently, natural gas accounts for about 25 percent of the nation’s energy production, and 22 percent of electricity production: given the abundance of natgas and its comparatively low price, policy makers and business executives should do what’s necessary to enable those percentages to increase.

And here’s another reason for increased use of natural gas: it’s a domestic U.S. energy source! Unlike oil, the importation of some of which results in a $200-$450 billion annual transfer of U.S. wealth to foreign producers and governments, natural gas production and consumption dollars are retained in the United States, creating domestic jobs and increasing the pool of funds for investment by American businesses.

Welcome to Money Matters

2009-09-03T11:30:00.001-04:00

In the battle of technical vs. fundamental analysis, the best tack may be a combination

2009-09-03T11:22:00.002-04:00

By Money Matters Editors

In the battle of technical vs. fundamental analysis, the best tack may be a combination.

Many investors in stocks know that there are numerous ways to evaluate the suitability of a stock. Two major methodological camps are fundamental analysts and technical analysts.

Each camp is broad and diverse, with teams of analytical brainpower - not to mention tens of millions of dollars in Wall Street research money - dedicated to each methodology.

Fundamental analysts concentrate on revenue, earnings, cash flow, revenue per employee, same store sales, book value, operating expenses, long-term debt and other balance sheet and income statement data etc. Fundamental analysts argue that performance data determines a stock’s price, i.e. that very little can be deduced from a stock’s price absent information on fundamentals.

Technical analysts, meanwhile, concentrate on clues provided by a stock’s price, emphasizing such indicators as chart formation, the 50-day and 200-day moving averages, its relative strength indicator, the MACD histogram, stochastics, and Bollinger Bands, among other technical data. Technical analysts argue that all public information about a company’s performance as already been priced in to a stock.

A synthesis

What’s the evaluation method preferred by Money Matters Editors? Our analysts and economists are eclectic: they use both fundamental and technical indicators, combine them with several proprietary variables, to arrive at what we believe is an informed, independent recommendation of a stock, sector, or market.

So when you see a Stock Review, Sector Analysis, or Market Analysis on Money Matters, know that it doesn’t favor a fundamental approach or technical analysis, but rather draws on both, and other variables, to provide a comprehensive look at a respective asset/investment instrument.

High U.S. savings rate has an upside and a downside

2009-09-02T15:28:00.003-04:00

By Money Matters Editors

In financial/business circles, a discussion of the U.S. savings rate is little like what writer Mark Twain said about the weather: 'Everyone talks about it, but no one ever seems to be able to do anything about it.'

Well, here’s what investors need to know about the U.S. savings rate: according to the latest U.S. Commerce Department data, the savings rate in July remained high at 4.2 percent, and long-term that’s good for the U.S. economy. The reason? It’s part of a process where Americans - who’ve seen their 401k and home values decline with the recession - begin to rebuild their nest eggs. The increased savings rate also will provide a larger pool of capital for investment- something that will keep interest rates lower than where they would be with a low savings rate, and that will make it easier for businesses to access capital to expand operations and investment in equipment.

'Frugal consumer': long-term trend?

Short-term, however, there’s a downside for the U.S. economy. Americans’ new ‘frugal consumer’ trend will result in dampened consumption, and this unwillingness of the consumer to spend will put a cap on GDP growth, again, at least short-term. In a frugal consumer era, it’s highly unlikely that U.S. GDP will increase as much as it historically has done at the start of an economic recovery. And that 'new normal' will also likely result in fewer new jobs, and also weigh on corporate revenue and earnings, particularly in the retail sector.

Further, it remains to be seen whether the high savings rate represents an enduring trend, or just a short-term phenomenon compelled by a decade of U.S. overconsumption caused by excessive debt (primarily home refinancings and home equity loans). If it’s a long-term trend - if Americans continue to saving more than roughly 5 percent of their disposable income annually - that would suggest that the U.S. will have to undergo another structural change, in addition to the structural changes already being prompted by globalization.

What would that additional structural change be? Undoubtedly it would mean that millions of jobs in the retail sector, as well as in other sectors (such as manufacturing, financial services) will be shed as the U.S. economy becomes more-focused on production, quality of life, and infrastructure concerns, and less on consumer goods. That transition will take at least a decade and will not be without pain, but ultimately it will lead to a more-productive, more-capital-rich, and balanced U.S. economy - one capable of sustainable economic growth.

When will the great American job creation machine kick into high gear?

2009-09-02T10:39:00.002-04:00

By Money Matters Editors

Economists, market analysts, and public policy professionals are hinting at data that will show an end to the U.S. recession sometime in Q3/Q4, if a recession bottom hasn’t already occurred yet.

But the real end to the recession - at least in terms of aggregate demand and the typical person’s daily life - concerns when the U.S. job market will turnaround. And that begs the obvious question: when can investors and Americans in general count on an end to the large job losses that have characterized this pronounced recession?

ADP: companies’ cutbacks decline

One preview of job market conditions in the period ahead is the ADP National Employment Report, and in August it showed a private-sector job loss of 298,000 jobs. July’s private-sector job loss total was also revised 11,000 lower to a loss of 360,000 jobs from the previously-released 371,000. Economists follow the ADP report because, although it contains just private-sector data, it usually tracks fairly closely the U.S. Labor Department’s monthly non-farm payroll report – one of most important economic data points in the free world.

And what can one conclude from the recent ADP data? It shows that job lay-offs are declining, they’re trending lower, but they’re still at a high level. Regarding the upcoming U.S. Labor Department report, economists expect the U.S. economy to have shed 200,000 jobs in August.

The bottom line for investors? Employment, usually a lag indicator, is still dramatically too low to drive high GDP growth, and that’s a major reason why many economists are forecasting a mild recovery, with Q3/Q4 GDP growth well below what the United States would register during a typical recovery.

Why is job growth important? It’s very hard for corporate revenue and earnings to increase at an adequate rate without job growth. Further, the annual increase in adults eligible for work puts pressure on the U.S. economy to continually create jobs: the economy must create 100,000 jobs pre month, just to prevent the unemployment rate from rising. (The U.S.'s unemployment rate is currently 9.4 percent.) How big is the task for economy, then? It’s huge: given that 6.8 million jobs have been lost during the recession (not including the August data), the U.S. economy would have to create 200,000 jobs per month for about 5.5 years, just to replace the jobs lost - an enormous task.

Given the restructuring occurring in the U.S. economy, the United States must identify/create new, value-added industrial/tech sectors - in health care services, information technology, infrastructure, education, renewable energy, high-end/tech-based manufacturing, and biotech - to make up for the industrial output and jobs lost to globalization. Those new sectors must appear for the United States to remain a strong, versatile, and prosperous nation with ample economic opportunities, and sustainable GDP growth.

Where is the U.S. dollar headed from here?

2009-09-01T11:15:00.004-04:00

By Money Matters Editors

Where’s the U.S. dollar headed from here? Well, if you’re in the camp that argues that both U.S. monetary and fiscal stimulus guarantee rising U.S. inflation, the dollar will likely weaken in the immediate quarters ahead, and probably for longer.

If you’re in the camp that argues that given asset destruction, and massive job lay-offs, price power is non-existent, the dollar will hold its own against the world’s other major currencies.

The dollar weakened about one-half cent Tuesday to $1.4319 and $1.6232 versus the euro and British pound, respectively. The dollar was virtually unchanged versus Japan’s yen at 93.27 yen.

Autumn: season of decision for dollar?

Further, the autumn could prove to be ‘the season of decision’ for the dollar. The U.S.’s structural budget deficit - that’s the deficit that will likely exist whether the economy is in expansion or recession - is in the $700 billion to $1.1 trillion range, and that fact, combined with institutional investors re-evaluating portfolios as they return from summer vacations (when trading volumes are light), could result in institutions rotating out of dollar-based investments, weakening the dollar, and driving up U.S. interest rates. That all the more underscores the need for the U.S. Congress to cut the budget deficit, and health care reform is a major factor in that effort, due to the projected increases in federal health care spending without health care reform. If serious deficit reduction doesn’t occur, and institutions start decreasing their dollar-denominated assets and dollar positions, emerging market giants China, India, Brazil, and Russia might combine with other large U.S. public debt holders Japan and Saudi Arabia and renew their effort to create an alternate global reserve currency - further weakening the dollar’s status, and likely further increasing U.S. interest rates.

One factor that could work in favor of the dollar? U.S. GDP growth. You read correctly: U.S. GDP growth. The currency market is starting to price-in capital flight from the U.S. to healthier emerging markets economies, particularly those in Asia, which are likely to register impressive growth rates as the global economic recovery takes hold. All other factors being equal, capital chases return, and most economic models show more robust growth in Asia, not the U.S., in the recovery’s initial stage.

However, U.S. GDP growth could surprise. To be sure, no one expects the United States to return to Clinton administration-era, 300,000-job-gain months, but the recovery could be stronger than expected in Q3/Q4 2009 and Q1/Q2 2010, particularly if the housing sector snaps back quicker.

And the latter scenario would be bullish for the dollar, leaving the dollar bears on the short end of a dollar-short stick.

Oil: The commodity that's largely ignored the U.S./global recession

2009-08-31T14:29:00.003-04:00

By Money Matters Editors

What’s the most perplexing market in the world? Well, a strong case can be made that it’s the oil market.

The oil market’s fundamentals – primarily high inventories - argue that the price should be considerably lower, perhaps as low as $40-45 per barrel, and yet, oil’s price hangs in the $70-range. What’s going on here?

Some assert that market speculation - institutional investors who establish positions in oil not for industrial reasons, but simply as an investment - are keeping oil’s price artificially high, or above where it would be based on supply/demand fundamentals. Net long positions did increase in the past week to more than 16,800 contracts - a period when oil briefly neared $75 per barrel - according to the Commodity Futures Trading Commission, marketwatch.com reported Monday.

Can oil bulls keep crude’s price high?

Still, it remains to be seen whether the oil bulls, including speculative longs, can keep oil near $70 amid plentiful supplies and slack demand. On the former, oil storage facilities on land have started to run out of room, so oil holders are storing oil in super tankers at sea. On the latter, slack demand in the U.S., due to more than 6.8 million job lay-offs since the recession started, and modest demand increases in emerging markets, have been unable to prevent supplies from building.

This fall, the U.S. Congress is expected to again take up the issue of the role speculation plays in the price of oil futures, including considering proposals to limit speculative positions by increasing margin requirements, or by capping the number of positions an institution/trader can hold, and certainly if oil remains at its current lofty price, there will likely be increased pressure to investigate market participants who trade the world’s most important commodity.

On the other hand, if oil’s price corrects back to $40-50 per barrel, the pressure on Congress to investigate may lessen. Where’s oil headed from here? If emerging market GDP growth in Q3 meets/exceeds expectations, that will keep oil at/near its current price, about $65-70.

However, if any signs of lower-than-expected Q3 GDP growth in Asia, especially China, appear, that will bring the oil bears out in force, and oil will likely drift back toward the $50-range heading into the end of the year.

Should Bernanke have been re-nominated as Fed Chairman?

2009-08-31T11:58:00.003-04:00

By Money Matters Editors

Should President Barack Obama (D-Illinois) have re-nominate Ben Bernanke as chairman of the U.S. Federal Reserve?

Ask three economists and you’re likely to get three different answers. From political and public policy standpoints, the decision to re-nominate Bernanke was not a slam-dunk. But the more-important values of expertise, performance, and continuity have won out, and that represents a victory for investors, and for American taxpayers. Here’s why:

History has a way of placing the right person in the right position at an appropriate time, and that’s been the case with Bernanke. A Princeton economist who has spent a lifetime studying the Federal Reserve’s responses, successes, and failures during the last global financial crisis, the Great Depression, little did Bernanke - or policy makers, for that matter - know that his academic specialization would prove to be invaluable preparation for world’s second, major credit trauma, the current financial crisis. Perhaps more than anyone, Bernanke has a keen grasp of the 1930s Fed’s mistakes and monetary tools that did work during that crisis. This time, backed by an army of Fed economists and researchers, and via accessing Bernanke’s knowledge, the Fed has been able to steer a path to financial stabilization.

First hurdle cleared

And that’s the main reason for Bernanke’s re-nomination: we’re not out of woods yet - far from it - regarding the credit crunch, but U.S. banking system and the global financial system has not collapsed and has been maintained. That may not seem like much to investors, but based on where we were a year ago, in September 2008, that’s an awful lot. There have been mistakes - the decision not to, at minimum, stabilize Lehman Brothers was perhaps the biggest - but the Fed, in conjunction with other, major central banks, including the European Central Bank, Bank of England, Bank of Japan, has move adeptly to provide essential liquidity to credit markets, especially commercial paper, to keep the lifeblood of commerce - capital - flowing. To be sure, small/medium sized businesses still aren’t able to borrow enough capital to expand their operations, but the Fed’s liquidity interventions and term auction facilities have maintained bond market and broader credit market liquidity. Again, that may not seem like much, but it is an enormous achievement. Consider this: a half-year ago the industrial giant General Electric (GE) was having trouble accessing short-term capital in the commercial paper market.

True, Bernanke’s actions have not been without blemishes. Some have argued that the Fed has been too forth-coming with liquidity, or too accommodative, and that will lead to rising U.S. inflation in the quarters ahead, and some are calling for an immediate decrease of that monetary flow. But given the scope of the liquidity crunch - and historical precedent - one can understand why the Fed would rather err on the side of too much liquidity than too little.

A second criticism concerns the $700 billion Troubled Asset Relief Program (TARP), the bank bailout, and whether the U.S. taxpayer will be repaid in full, but that is more-properly an issue for the U.S. Congress. As of this juncture, it’s an open question whether the government will be able to obtain even 60-70% of its invested money back, and much will hinge on how the U.S./global recoveries affect the value of distressed assets.

But one thing is certain: the U.S. and global financial systems are healing. As noted, much work remains to free-up more credit for businesses and individuals, and it’s unlikely credit markets will ever be ‘normal’ in a pre-financial crisis sense (numerous structural and regulatory changes will occur), but the flow of capital and the modern banking system that’s essential to commerce has been maintained. The first hurdle of the financial crisis - avoiding a degeneration into the barter system - has been mounted, and Chairman Bernanke is a key reason investors and economists can concentrate on the second hurdle.

Welcome to Money Matters

2009-08-30T11:50:00.004-04:00

Further, because our focus is on you, the investor, we want to hear from you to make our service better. Please offer your thoughtful comments in the comments section provided.

Money Matters has assembled a team of experienced reporters, analysts, columnists, and economists with one goal in mind: to help you navigate through these challenging times.

Our Stock Reviews by our stock analysts are based on an independent, proprietary stock investment formula, and is not affiliated with any bank, brokerage, or research service. If you’re looking for a stock to invest in, low risk to high risk, be sure to check out our Stock Reviews.

Thank you for reading Money Matters, and visit us again soon.

-Money Matters Editors