Hello again. Its been awhile since I last posted my ruminations. I have been following the health care debate, the economy and the Ft. Hood disaster. Where should we stick that thermometer? I'll let you decide that answer.
Have you noticed a lot of commercials about gold lately? At $1,100 an ounce, I am tempted myself to yank out some teeth or melt down some coins to cash in. Why is this price so high? Gold has historically been the flight from panic commodity. Our money system used to be based on gold. Recently, India purchased a ton of gold from the IMF, in fact half of what the IMF was selling. Why is this important? It tells us that people, not just Americans, are nervous. While inflation seems to be far off, anyone that has any exposure to U.S. dollars, seems to believe that the dollar is not a long term play. Which brings me to the US dollar. There is an index called the Dollar Index that compares the dollar to a weighted basket of world wide currencies. Right now, that Index is very low. The weak dollar may help us sell goods overseas but doesn't help us buy stuff from overseas. As we all know, we have a trade deficit and import more than we export.
Where are the jobs? Stimulus? Hmm. I think there were some major problems with the way the stimulus was structured but it did have some benefit but not enough to prevent unemployment going to 10%. The weekly claims number came out and it was downright depressing. Another 500,000 out of work. This week, lawmakers ripped into the www.recovery.gov website. Apparently, people were reporting jobs created from Congressional districts that didn't exist. Yikes. Right now, companies are trying to get lean and mean. Making more with less is what the companies are looking at in face of less demand. Productivity is important. Once companies get to a point where they can't get any leaner, than we'll see jobs come back. At this point, my prediction is Q310 until we see sustainable and positive job growth.
Finally, government spending is alarming. The National Debt Clock just ticked at $12trillion. Wow, I can't even fathom that. Meanwhile, the various legislations passing through Congress are frightening. Cap and Trade (Climate Change), new financial regulation, caps on compensation and as of today, the health care reform bill. I believe the tally on that sucker is going to be $865 billion but it is tricky math. Did you know that the benefits for that plan don't roll out until 2014? Did you also know that you, me, everyone will be paying more taxes immediately to pay for it. I know this stuff is pretty dry and boring but like the mortgage situation that was ignored by the common citizen, if we don't pay attention, we'll see our taxes go up. I don't talk politics on this blog and will refrain. I focus on the financial impacts.
Before you grab the bottle of wine, Scotch or the pack of smokes, don't fret. We are Americans, with the Capital A. We live in the greatest country in the world and we'll survive. Keep your chin up and pay attention. Cheers!
Thursday, November 19, 2009
Thursday, October 22, 2009
Compensation
Good evening. The economy continues to flounder along. The initial new claims number came out today from the Labor Department and it was higher than expected. It actually increased. I didn't hear much from the spin doctors but apparently Wall Street shrugged it off as the market rose due to some positive earnings news. But I didn't want to discuss this as I have in previous posts. The big news was two announcements, one from the pay czar and one from the Fed Chairman about executive compensation.
While I am an adovacate of capitalism and the free market, it is hard to argue that compensation shouldn't be limited by the government for firms that take taxpayer money to bail them out. I just can't win that argument. I am concerned though about the pay limitations that the Fed wants to put on the nation's banks. Bonuses would be subject to the government's discretion. Compensation has been a seeping wound for many many years. The compensation of the higher echelon of executives have been outstripping the common worker exponentially over the last several decades. There are many arguments pro and con about how much somebody, particularly a CEO, is paid. I think policymakers are trying to take advantage of the current crisis by hamstringing the banks from paying high performers that create the wealth and strong stock prices that benefit many people. As a former commercial banker, bonuses for management were driven by company performance and personal performance. The overriding kicker was credit quality, or in other words if you took too many risks and had questionable loans, your bonus would be adjusted. While it seemed arbitrary at the time, the system worked. The current crisis started with the real estate market and some pretty bad actors. All of the United States's banks, probably about 8,000 of them were not all bad bankers. Of the ones that were, they either were shut down, acquired or will be. We need to take a breath before we overregulate our banks. Let's keep our eye on the problems of easy credit and lack of enforcement.
While I am an adovacate of capitalism and the free market, it is hard to argue that compensation shouldn't be limited by the government for firms that take taxpayer money to bail them out. I just can't win that argument. I am concerned though about the pay limitations that the Fed wants to put on the nation's banks. Bonuses would be subject to the government's discretion. Compensation has been a seeping wound for many many years. The compensation of the higher echelon of executives have been outstripping the common worker exponentially over the last several decades. There are many arguments pro and con about how much somebody, particularly a CEO, is paid. I think policymakers are trying to take advantage of the current crisis by hamstringing the banks from paying high performers that create the wealth and strong stock prices that benefit many people. As a former commercial banker, bonuses for management were driven by company performance and personal performance. The overriding kicker was credit quality, or in other words if you took too many risks and had questionable loans, your bonus would be adjusted. While it seemed arbitrary at the time, the system worked. The current crisis started with the real estate market and some pretty bad actors. All of the United States's banks, probably about 8,000 of them were not all bad bankers. Of the ones that were, they either were shut down, acquired or will be. We need to take a breath before we overregulate our banks. Let's keep our eye on the problems of easy credit and lack of enforcement.
Thursday, September 17, 2009
State of the Economy
Good morning everyone. Understandably from my last post, I took a bit of a hiatus from my postings to the blog. After digesting the news of the last month or so and watching the shenanigans on Capitol Hill, I am ready to get back in the saddle.
The other day, Fed Chairman Ben Bernanke made some positive comments about the economy. The quote that I saw was that the recession was likely over. Just like I heard the comment about "green shoots", I am very skeptical of course. To his credit, he did caution about a recovery being slow (or moderate) and 2010 would be not a stupendous year.
Every week, the Labor Department issues reports on the job market. This morning, jobless claims data came out. 545,000 people filed initial unemployment claims last week. The week before it was 557,000 people. The economists had forecasted a higher number and you'll see the spin doctors in force today saying the economy is improving. Look harder into those stories and the data. The data that gets buried is the fact that people that are still on unemployment is 6.23 million people. The other thing that I don't think is reported is the people that ran out of benefits or decided to give up. The last check on the unemployment rate was about 9.7% of the labor force.
Another lovely measure came out today, the housing starts number. The data showed a 1.5% jump in housing starts. Again, look at the numbers. Most of that jump was multi-family homes. While that is a positive sign, historically about 80% of housing starts is single family homes and that number declined.
Jobs and housing continue to struggle. The wonder of living in today's world is that we have many alternative sources for information and don't need to rely on three media outlets and newspapers. What I have learned (the hard way in some cases) is that you need to continue to read the whole story not just the headline. Before people dance in the streets thinking that the economy has recovered, think again. Once the number of unemployment moves down and that initial claims number continues to fall, then we can start slapping each other on the backs. Stay strong!
The other day, Fed Chairman Ben Bernanke made some positive comments about the economy. The quote that I saw was that the recession was likely over. Just like I heard the comment about "green shoots", I am very skeptical of course. To his credit, he did caution about a recovery being slow (or moderate) and 2010 would be not a stupendous year.
Every week, the Labor Department issues reports on the job market. This morning, jobless claims data came out. 545,000 people filed initial unemployment claims last week. The week before it was 557,000 people. The economists had forecasted a higher number and you'll see the spin doctors in force today saying the economy is improving. Look harder into those stories and the data. The data that gets buried is the fact that people that are still on unemployment is 6.23 million people. The other thing that I don't think is reported is the people that ran out of benefits or decided to give up. The last check on the unemployment rate was about 9.7% of the labor force.
Another lovely measure came out today, the housing starts number. The data showed a 1.5% jump in housing starts. Again, look at the numbers. Most of that jump was multi-family homes. While that is a positive sign, historically about 80% of housing starts is single family homes and that number declined.
Jobs and housing continue to struggle. The wonder of living in today's world is that we have many alternative sources for information and don't need to rely on three media outlets and newspapers. What I have learned (the hard way in some cases) is that you need to continue to read the whole story not just the headline. Before people dance in the streets thinking that the economy has recovered, think again. Once the number of unemployment moves down and that initial claims number continues to fall, then we can start slapping each other on the backs. Stay strong!
Monday, August 3, 2009
Mom and the Health Care System
In mid- 2002, we were basking in the glow of our recent wedding and pending arrival of our first child. Soon thereafter, Mom finally decided to start complaining about her pains in her stomach. Those pains were two football sized tumors on her ovaries. Mom was diagnosed with Stage 3 ovarian cancer. At that point on, I began to learn intimately about the healthcare system in the United States.
Mom had a 5 hour surgery in the fall of 2002 to remove the tumors but the surgeon at the University of Florida-Shands Center told us that this wasn't the end of the cancer. After Mom underwent chemotherapy in the months that followed, the cancer was beaten for now. Well, we always knew it would come back. Sure enough in 2004, it spread to her colon. Yes, another battery of tests and surgery at Citrus Memorial in Inverness to remove the cancerous legions. Then another large tumor was found in her brain. In 2005, yet another series of tests and then surgery at George Washington Hospital to remove the tumor (which was malignant). Mom never complained and took every opportunity to spread her good humor with her caregivers.
In 2007, the cancer spread back into her brain and she endured another battery of tests and then radiation. Later in the year, we learned that the tumors grew and the oncologist told us there was nothing more to be done. Yet, Mom kept her chin up and lived each day as it was her last. Sadly, Mom's last day was Sunday on a warm, rainy morning in her nursing home bed in Warrenton, VA.
During this painful time, we watched her savings eaten away by the mounting medical bills. Medicare paid for a large amount but only 80% of the costs. Her secondary insurer, United would only pick up the cost if she paid a huge deductible. I witnessed first hand the professionalism and compassion of all the doctors, nurses and just plain old volunteers. They welcomed Mom's view on life and it gave them a bright spot in their day. The doctors and nurses were clearly overworked and carried themselves through on limited time for their own families. It was overwhelming to see the amount of the bills that came in during this time. I gained a perspective on both sides of the health care reform issue first hand. "Why can't Mom get that drug?" I would ask but she would get some other lesser known or less efficient drug. When her pain would go away because of one of her prescriptions, we were thankful. We realized that a lot of R&D, money and resources went into that drug to get it to the market. We also knew that there were another 9 or so drugs that didn't make it to that stage. I also knew that the younger generation who has less health issues were paying the premiums so my Mom could be kept alive and keep her treated so she could see her grandkids. Lastly, the continuous interactions between Mom and her caregivers were important and never driven by what she could afford. The goal was always on what would be done to help her.
As we get deeper and deeper into debate about the health care reform bill, the costs, criticisms of the current system and positions, let's remember that the current health system while it has its problems, it does have tremendous benefits. We were able to have Mom with us for another 6+ years but the lack of a cure for cancer robbed us of her wonderful presence for an unknown amount of years.
Cheers.
Mom had a 5 hour surgery in the fall of 2002 to remove the tumors but the surgeon at the University of Florida-Shands Center told us that this wasn't the end of the cancer. After Mom underwent chemotherapy in the months that followed, the cancer was beaten for now. Well, we always knew it would come back. Sure enough in 2004, it spread to her colon. Yes, another battery of tests and surgery at Citrus Memorial in Inverness to remove the cancerous legions. Then another large tumor was found in her brain. In 2005, yet another series of tests and then surgery at George Washington Hospital to remove the tumor (which was malignant). Mom never complained and took every opportunity to spread her good humor with her caregivers.
In 2007, the cancer spread back into her brain and she endured another battery of tests and then radiation. Later in the year, we learned that the tumors grew and the oncologist told us there was nothing more to be done. Yet, Mom kept her chin up and lived each day as it was her last. Sadly, Mom's last day was Sunday on a warm, rainy morning in her nursing home bed in Warrenton, VA.
During this painful time, we watched her savings eaten away by the mounting medical bills. Medicare paid for a large amount but only 80% of the costs. Her secondary insurer, United would only pick up the cost if she paid a huge deductible. I witnessed first hand the professionalism and compassion of all the doctors, nurses and just plain old volunteers. They welcomed Mom's view on life and it gave them a bright spot in their day. The doctors and nurses were clearly overworked and carried themselves through on limited time for their own families. It was overwhelming to see the amount of the bills that came in during this time. I gained a perspective on both sides of the health care reform issue first hand. "Why can't Mom get that drug?" I would ask but she would get some other lesser known or less efficient drug. When her pain would go away because of one of her prescriptions, we were thankful. We realized that a lot of R&D, money and resources went into that drug to get it to the market. We also knew that there were another 9 or so drugs that didn't make it to that stage. I also knew that the younger generation who has less health issues were paying the premiums so my Mom could be kept alive and keep her treated so she could see her grandkids. Lastly, the continuous interactions between Mom and her caregivers were important and never driven by what she could afford. The goal was always on what would be done to help her.
As we get deeper and deeper into debate about the health care reform bill, the costs, criticisms of the current system and positions, let's remember that the current health system while it has its problems, it does have tremendous benefits. We were able to have Mom with us for another 6+ years but the lack of a cure for cancer robbed us of her wonderful presence for an unknown amount of years.
Cheers.
Friday, July 31, 2009
What the heck is GDP?
Today, the Commerce Department released its report on the second quarter (Apr-Jun) gross domestic product. According to their numbers, the US economy contracted at a 1% clip (on an annual basis). In the first quarter, GDP contracted at 6.4%. A big improvement? Hmm, let's get past the headline. First and foremost, what is gross domestic product and can I buy it in my local supermarket.
GDP is one of the more widely measured and monitored calculations around the world. It measures the final value of goods and services produced by a country in a year. For you formula geeks, its private consumption + investment + government spending + (export-import). Now for you fans of my blog, you'll remember that consumer spending (consumption) makes up 2/3rds of the economy. Well for Q2, consumer spending fell by1.2%. With that fall, where was the improvement in the rest of the formula? Investment which measures what businesses buy for equipment and other investment in the business fell by 8.9%. Investment also measures what you and I do with buying a new or existing home fell by (yikes) 29.3%. Now, exports fell only by 7% (vs. 29% last quarter). The culprit there? That is the falling dollar making our goods cheaper for foreign buyers.
If I haven't bored you to death yet, the coup de grace, government spending was the stalwart in the quarter. Yes, our beloved government spending its stimulus money to prop up the economy. Some would say that if they didn't intervene we could be looking at a really bad quarter. I say that if the stimulus had more infrastructure spending and more of it spent in this year vs. next, we could be looking ok. We can argue about the spending in that stimulus program another time as there are many stories of waste as we speak (NEA - porn spending).
The government spending appears to have masked a really bad economy and a falling US dollar. While the headline would have you believe that the GDP result as better than expected, look deeper folks. Look deeper into any headline you read now. The spin doctors are out in force these days, making bad news look like honey. Have a good weekend! Cheers.
GDP is one of the more widely measured and monitored calculations around the world. It measures the final value of goods and services produced by a country in a year. For you formula geeks, its private consumption + investment + government spending + (export-import). Now for you fans of my blog, you'll remember that consumer spending (consumption) makes up 2/3rds of the economy. Well for Q2, consumer spending fell by1.2%. With that fall, where was the improvement in the rest of the formula? Investment which measures what businesses buy for equipment and other investment in the business fell by 8.9%. Investment also measures what you and I do with buying a new or existing home fell by (yikes) 29.3%. Now, exports fell only by 7% (vs. 29% last quarter). The culprit there? That is the falling dollar making our goods cheaper for foreign buyers.
If I haven't bored you to death yet, the coup de grace, government spending was the stalwart in the quarter. Yes, our beloved government spending its stimulus money to prop up the economy. Some would say that if they didn't intervene we could be looking at a really bad quarter. I say that if the stimulus had more infrastructure spending and more of it spent in this year vs. next, we could be looking ok. We can argue about the spending in that stimulus program another time as there are many stories of waste as we speak (NEA - porn spending).
The government spending appears to have masked a really bad economy and a falling US dollar. While the headline would have you believe that the GDP result as better than expected, look deeper folks. Look deeper into any headline you read now. The spin doctors are out in force these days, making bad news look like honey. Have a good weekend! Cheers.
Wednesday, July 29, 2009
Nothing Happens in the Summer
Hello everyone. While the economy continues its struggles and the heat of the summer drones on, the news continues to remain hot, not cool. Usually, our beloved Congress is gearing up for a long vacation recess and not much is on the table. In my last post, I hinted that I would actually read the 1,000 page monstrosity of a health care reform bill. At this point, there is a lot of activity but not much to review yet. There are different versions of this bill in various committees. Why is this so important to you? This reform affects 1/6th of the economy, your healthcare plan now and in the future. We all know the status quo is not sustainable nor acceptable. But the alternatives are becoming unpalatable. One side of Congress believes an overhaul is required while the other side believes that we should fix the system step by step.
In some cases, I am afraid to go on vacation myself. Congress might sneak in a bill that hurts the country during the recess. Its happened before and doesn't mean it can't happen again. Meanwhile, there are many regulatory controls being bandied about in Congress and they don't get the same level of media coverage, which is a shame. I believe that more regulation is not the way to go. Putting in the right regulation and actual enforcement of that regulation is the best approach. Unfortunately, the regulations we have now didn't prevent the financial mess we are in now but the actual oversight of those regulations did.
Do you know that Fannie Mae and Freddie Mac hold 1/2 of all mortgages in the United States. How did they do that? Well, our beloved government allowed them to buy more mortgages and take greater risks. Your local mortgage broker and bank don't have the capital to offer unending supply of mortgages. The money comes from Fannie/Freddie who pays the local bank for the mortgages. Fannie/Freddie bundle these things up and sell them on the financial market. Vicious cycle when things are going down. But I digress...
While we are accustomed to nothing happening in August, don't fall asleep in that hammock! You might wake up to a universal health care plan that you didn't bargain for. Cheers!
In some cases, I am afraid to go on vacation myself. Congress might sneak in a bill that hurts the country during the recess. Its happened before and doesn't mean it can't happen again. Meanwhile, there are many regulatory controls being bandied about in Congress and they don't get the same level of media coverage, which is a shame. I believe that more regulation is not the way to go. Putting in the right regulation and actual enforcement of that regulation is the best approach. Unfortunately, the regulations we have now didn't prevent the financial mess we are in now but the actual oversight of those regulations did.
Do you know that Fannie Mae and Freddie Mac hold 1/2 of all mortgages in the United States. How did they do that? Well, our beloved government allowed them to buy more mortgages and take greater risks. Your local mortgage broker and bank don't have the capital to offer unending supply of mortgages. The money comes from Fannie/Freddie who pays the local bank for the mortgages. Fannie/Freddie bundle these things up and sell them on the financial market. Vicious cycle when things are going down. But I digress...
While we are accustomed to nothing happening in August, don't fall asleep in that hammock! You might wake up to a universal health care plan that you didn't bargain for. Cheers!
Wednesday, July 22, 2009
Hodgepodge
Hello everyone. My last post covered oil speculation and I had promised to cover more about the underlying supply and demand dynamics on this post. There is way too much to talk about and the oil price seems to be stuck in the $60-$75 range for now. Being out and about these days, the underlying concerns with people I visit seem to be about where the economy is going, what the government has been doing and their plans going forward.
The biggest news of the week is healthcare. I spoke about healthcare awhile ago before any plan was submitted. Well, the plans have been submitted and the Congressional Budget Office (a nonpartisan group in the Congress) said that the plans would add to our deficit woes. Deficit spending seems to be an American tradition. I could spend hours discussing the details of the plan but I think my main concern is the cost to us the taxpayer and to businesses. Tax the rich, a surtax in fact! Easy choice, but it won't pay for the plan. Tax businesses! Hmm, nice move but that hurts economic growth. I saw a statistic that 3/4 of all business are small ones. More to come on this as Congress is pushed into voting for a costly bill....
Last week, Henry Paulsen (the former Treasury Secretary) testified in front of Congressional panels investigating the Bank of America/Merrill Lynch merger/acquisition. As you recall, the CEO of BoA (Ken Lewis) said there was pressure from our government NOT to back out of the deal. Well, Mr. Paulsen admitted that. Where is the outrage on this? I guess people wanted the government to order people around last fall.
A watchdog for the TARP program postulated that the program along with other government bailout programs could cost $23.7 trillion before its all said and done. Wow. I think the estimate is high but even at $10 trillion, its a bit scary. Get the printing presses ready!
Again and again, the press is gloming onto more signs that the economy is turning around. I, frankly, don't see it yet. Until consumer spending comes back and the credit market continues to open, then we can talk. Foreclosures continue and people who have modified their mortgages still remain in trouble. I did notice one thing the other night, I saw that a 1969 Mustang Boss 429 model sold at auction for $195,000. People still have money but they aren't spending as readily as they did.
Stay tuned as I'll attempt to unravel the cost of the healthcare plan. I don't think we need more debate about actual reform provisions. Stay strong.
The biggest news of the week is healthcare. I spoke about healthcare awhile ago before any plan was submitted. Well, the plans have been submitted and the Congressional Budget Office (a nonpartisan group in the Congress) said that the plans would add to our deficit woes. Deficit spending seems to be an American tradition. I could spend hours discussing the details of the plan but I think my main concern is the cost to us the taxpayer and to businesses. Tax the rich, a surtax in fact! Easy choice, but it won't pay for the plan. Tax businesses! Hmm, nice move but that hurts economic growth. I saw a statistic that 3/4 of all business are small ones. More to come on this as Congress is pushed into voting for a costly bill....
Last week, Henry Paulsen (the former Treasury Secretary) testified in front of Congressional panels investigating the Bank of America/Merrill Lynch merger/acquisition. As you recall, the CEO of BoA (Ken Lewis) said there was pressure from our government NOT to back out of the deal. Well, Mr. Paulsen admitted that. Where is the outrage on this? I guess people wanted the government to order people around last fall.
A watchdog for the TARP program postulated that the program along with other government bailout programs could cost $23.7 trillion before its all said and done. Wow. I think the estimate is high but even at $10 trillion, its a bit scary. Get the printing presses ready!
Again and again, the press is gloming onto more signs that the economy is turning around. I, frankly, don't see it yet. Until consumer spending comes back and the credit market continues to open, then we can talk. Foreclosures continue and people who have modified their mortgages still remain in trouble. I did notice one thing the other night, I saw that a 1969 Mustang Boss 429 model sold at auction for $195,000. People still have money but they aren't spending as readily as they did.
Stay tuned as I'll attempt to unravel the cost of the healthcare plan. I don't think we need more debate about actual reform provisions. Stay strong.
Monday, July 13, 2009
Oil Speculation
Hello everyone. Its been awhile since I last made my post due to the holiday weekend and other more important endeavors. Last week, the CFTC and others have proposed some tougher restrictions on speculators in the energy sector commodities. This seems like an easy move. A move made to keep the dogs at bay in response to the run up of oil prices last year to $140 per barrel. On the surface, it looks and feels good.
Below the surface, it is emitting a foul odor. A lot of blame has been put at the feet of the speculator for the run up last year. I would also say that run up of prices was a temporary spike and feeling that the current supply/demand picture of oil was out of whack. Oil is a finite resource. Most of it has been drilled and a good chunk of it is coming from hostile and politically unstable countries. Nigeria is a prime example. How many times do you hear about stories of refineries being attacked? Its like a broken record, over and over again. On the demand side and what a large portion of our government wants to ignore is that China and India are growing very fast. That growth requires substantial amounts of energy. Even scarier is that a large portion of their populations don't own cars.
So what purpose does speculators have in the market? They are essentially the smaller third player in the market. There are the large index or hedge funds and on the other side is the commercial hedger booking their oil for future requirements. The speculator can drive markets but eventually, they don't have enough fire power to withstand the "strong hands", the funds and the commercials. For the layman, I could control 42,000 gallons of oil but simply putting up about $10,000 to buy a futures contract, which is tremendous leverage. Last summer, the market felt that given the demand and shrinking supply, the proper price for oil was $140 per barrel. Shortly after that, the economy began to tank and with that the speculators were wiped from the market. The price of oil plummented to $36 per barrel. We call this price discovery. Now the oil price has risen back up to the $60-$70 range but its not $140.
I feel there is always a need for some speculation in any market to allow another opinion on price just like there is in the stock market. The key question is toggling that leverage or margin to make it a bit more harder to manipulate the market the way it was last summer. Those hedge and index funds have lower margins than the speculator. Let's make them pony up some more funds to play in the game.
Stay tuned for next week's post as I'll delve more into oil, its supply and demand picture and how this hits your pocketbook/wallet. Cheers!
Below the surface, it is emitting a foul odor. A lot of blame has been put at the feet of the speculator for the run up last year. I would also say that run up of prices was a temporary spike and feeling that the current supply/demand picture of oil was out of whack. Oil is a finite resource. Most of it has been drilled and a good chunk of it is coming from hostile and politically unstable countries. Nigeria is a prime example. How many times do you hear about stories of refineries being attacked? Its like a broken record, over and over again. On the demand side and what a large portion of our government wants to ignore is that China and India are growing very fast. That growth requires substantial amounts of energy. Even scarier is that a large portion of their populations don't own cars.
So what purpose does speculators have in the market? They are essentially the smaller third player in the market. There are the large index or hedge funds and on the other side is the commercial hedger booking their oil for future requirements. The speculator can drive markets but eventually, they don't have enough fire power to withstand the "strong hands", the funds and the commercials. For the layman, I could control 42,000 gallons of oil but simply putting up about $10,000 to buy a futures contract, which is tremendous leverage. Last summer, the market felt that given the demand and shrinking supply, the proper price for oil was $140 per barrel. Shortly after that, the economy began to tank and with that the speculators were wiped from the market. The price of oil plummented to $36 per barrel. We call this price discovery. Now the oil price has risen back up to the $60-$70 range but its not $140.
I feel there is always a need for some speculation in any market to allow another opinion on price just like there is in the stock market. The key question is toggling that leverage or margin to make it a bit more harder to manipulate the market the way it was last summer. Those hedge and index funds have lower margins than the speculator. Let's make them pony up some more funds to play in the game.
Stay tuned for next week's post as I'll delve more into oil, its supply and demand picture and how this hits your pocketbook/wallet. Cheers!
Friday, July 3, 2009
Health Care: A privilege or a right?
Its been a quiet week for the average Joe. Most people have taken this week (or next) off for vacation. Not too many email responses lately. With Fourth of July tomorrow, most people would rather think of fireworks and BBQs than health care. For those history buffs, two of the key father figures in our country, John Adams and Thomas Jefferson both died on the Fourth of July on the 50th anniversary of the signing of the Declaration of Independence.
With the drafting of such a document, our fates were set in motion to be one of the most powerful countries on Earth. We also have tremendous liberties that many people in the world only dream of. I am thankful that I live in America and actually choose to remain. With all of our problems and shortcomings, we still have it really good. Now, for health care....
You have likely heard all the hoopla about health care on both sides of the argument. 40+ million of uninsured, soaring costs, soaring malpractice, yada yada. The big issues in Congress is the so-called public option, cost of the program and taxing people with health care benefits. These are not easy issues thus the reason why Clinton wasn't successful in the 90s going down this path. Some say we should move toward systems that Canada or Europe have. Those systems have their limitations and the quality of care has been questioned. If we can look at some numbers, of that 40+ million folks that don't have health care, there is approximately 10 million that are illegal aliens. Hmm, now we are in the 30 million range. Our current arrangements cover the poor (Medicaid) and the over 65 (Medicare). Of that 30 million, there are some folks who just won't pay for it. Now for affording it, that is debatable. I think a health care voucher or tax credit might be a better approach. What about the people who have it now? Well, I can say that even with health care, you don't go to the doctor or hospital for any wiff of disease or ailment. It does cost money and any argument that says people would use their health care willy nilly is hollow.
What is the big rush on this? The proponents say that it would help the economy in the long run. I don't believe it, yet. The key issue is who pays for it? All of us through the raising of taxes, the hopefully to be defeated cap and trade and taxing of health care benefits. The other underlying issue people tend to forget is that Obama's popularity is strong and with the majorities in the Congress, the time is now to get their programs through. If they don't do it this year, people might sour on the whole idea. I am soured on government thinking they can solve any problem. Having to deal with a sick mother, I can tell you first hand that government can't handle the programs in place now. Hmm, let's add another program that we can mismanage.
What does this have to do with finance? Its the cost. Health care costs will rise and so will your taxes. The other potential bad news is if there is an ability for citizens to pick a public health plan, how will your current insurer react? They will either jack up your deductibles or your premium to compete. If they can't compete, they will fail and in turn that reduces supply of payors. For the business owner, you will be put in a pickle with deciding on plans and the added costs of your premiums. What do I suggest? I suggest that there are better ways of fixing healthcare by focusing on tax credits, vouchers, malpractice law and looking at what states have healthcare now and improving it.
Have a Happy Fourth! Stay tuned as I'll focus back on the financial headlines of the day....
With the drafting of such a document, our fates were set in motion to be one of the most powerful countries on Earth. We also have tremendous liberties that many people in the world only dream of. I am thankful that I live in America and actually choose to remain. With all of our problems and shortcomings, we still have it really good. Now, for health care....
You have likely heard all the hoopla about health care on both sides of the argument. 40+ million of uninsured, soaring costs, soaring malpractice, yada yada. The big issues in Congress is the so-called public option, cost of the program and taxing people with health care benefits. These are not easy issues thus the reason why Clinton wasn't successful in the 90s going down this path. Some say we should move toward systems that Canada or Europe have. Those systems have their limitations and the quality of care has been questioned. If we can look at some numbers, of that 40+ million folks that don't have health care, there is approximately 10 million that are illegal aliens. Hmm, now we are in the 30 million range. Our current arrangements cover the poor (Medicaid) and the over 65 (Medicare). Of that 30 million, there are some folks who just won't pay for it. Now for affording it, that is debatable. I think a health care voucher or tax credit might be a better approach. What about the people who have it now? Well, I can say that even with health care, you don't go to the doctor or hospital for any wiff of disease or ailment. It does cost money and any argument that says people would use their health care willy nilly is hollow.
What is the big rush on this? The proponents say that it would help the economy in the long run. I don't believe it, yet. The key issue is who pays for it? All of us through the raising of taxes, the hopefully to be defeated cap and trade and taxing of health care benefits. The other underlying issue people tend to forget is that Obama's popularity is strong and with the majorities in the Congress, the time is now to get their programs through. If they don't do it this year, people might sour on the whole idea. I am soured on government thinking they can solve any problem. Having to deal with a sick mother, I can tell you first hand that government can't handle the programs in place now. Hmm, let's add another program that we can mismanage.
What does this have to do with finance? Its the cost. Health care costs will rise and so will your taxes. The other potential bad news is if there is an ability for citizens to pick a public health plan, how will your current insurer react? They will either jack up your deductibles or your premium to compete. If they can't compete, they will fail and in turn that reduces supply of payors. For the business owner, you will be put in a pickle with deciding on plans and the added costs of your premiums. What do I suggest? I suggest that there are better ways of fixing healthcare by focusing on tax credits, vouchers, malpractice law and looking at what states have healthcare now and improving it.
Have a Happy Fourth! Stay tuned as I'll focus back on the financial headlines of the day....
Friday, June 26, 2009
Uber-Regulation?
This has been a pretty active week for the markets, consumers and for the fans of Michael Jackson and Farrah Fawcett. The deaths of two 70s/80s icons is painful given the circumstances of their untimely ends. But since this is a finance blog, I'll stick to my knitting.
Over the last several posts I have been discussing how interest rates and the Fed have a direct effect on you. This week, Chairman Ben Bernanke testified about his role in the forced or some say shotgun wedding of Merrill Lynch and Bank of America. There is some shreds of evidence that the CEO of BoA was forced to take the deal even though he (CEO) had doubts and was contemplating getting out of the deal. According to sources, both Bernanke and Paulsen either directly threatened the CEO with being fired or implicitly suggested changes would be made if the merger didn't close. Now what does this have to do with me? If you own BoA stock, you may have felt that the deal at the time was a bad one and didn't realize the CEO was forced to do it. The more scary fact is that there appeared to be heavy government interference in a commercial deal. I am in the camp that we don't need government involved to that depth in business.
This testimony came in wake of Obama and the Treasury's proposal for sweeping overhaul of the financial regulation of the economy. One key request was to give the Fed more power to call the shots on management teams, increase capital requirements and other measures. Another key request was the establishment of a consumer financial protection agency which would have some rule making authority. For people looking to borrow money for themselves and their business, while this extra protection may sound appealing, think again. Banks are heavily regulated to begin with and adding another layer which could cause rule conflicts are not the right answer. I believe innovation will be stifled along with the flow of credit to people and businesses that need it. After 9/11, regulations were put in place in the name of protecting us against terrorism. This law (Patriot Act) was passed without thinking through the ramifications. Again, we have politicians putting things together that are not well thought out.
The mess we are in now was a combination of a lack of regulation and a lack of oversight. IndyMac failed partly due to the lack of oversight of the Office of Thrift Supervision. Fannie/Freddie Mac took on way too much risk because Congress looked the other way. Now, we do have to think about the unregulated credit default swaps that sunk AIG. We don't need czars, uber-regulators and councils of regulators. We need an overhaul of the existing regulators, staff them properly and monitor their performance more effectively.
Now that my soap box has collapsed, what does this have to do with you? If you rely on credit, you have reason to worry. Credit will be even tougher to obtain and with that the growth of the economy will be anemic. That growth puts money in your pocket and provides a better way of life. This is a dangerous time in our history. During times of crisis, we put in safeguards with the best intentions. History has shown us that time and time again, these safeguards hinder innovation and economic growth.
Stay tuned for my next post as I'll venture into the health care plan and the financial impacts for you.
This has been a pretty active week for the markets, consumers and for the fans of Michael Jackson and Farrah Fawcett. The deaths of two 70s/80s icons is painful given the circumstances of their untimely ends. But since this is a finance blog, I'll stick to my knitting.
Over the last several posts I have been discussing how interest rates and the Fed have a direct effect on you. This week, Chairman Ben Bernanke testified about his role in the forced or some say shotgun wedding of Merrill Lynch and Bank of America. There is some shreds of evidence that the CEO of BoA was forced to take the deal even though he (CEO) had doubts and was contemplating getting out of the deal. According to sources, both Bernanke and Paulsen either directly threatened the CEO with being fired or implicitly suggested changes would be made if the merger didn't close. Now what does this have to do with me? If you own BoA stock, you may have felt that the deal at the time was a bad one and didn't realize the CEO was forced to do it. The more scary fact is that there appeared to be heavy government interference in a commercial deal. I am in the camp that we don't need government involved to that depth in business.
This testimony came in wake of Obama and the Treasury's proposal for sweeping overhaul of the financial regulation of the economy. One key request was to give the Fed more power to call the shots on management teams, increase capital requirements and other measures. Another key request was the establishment of a consumer financial protection agency which would have some rule making authority. For people looking to borrow money for themselves and their business, while this extra protection may sound appealing, think again. Banks are heavily regulated to begin with and adding another layer which could cause rule conflicts are not the right answer. I believe innovation will be stifled along with the flow of credit to people and businesses that need it. After 9/11, regulations were put in place in the name of protecting us against terrorism. This law (Patriot Act) was passed without thinking through the ramifications. Again, we have politicians putting things together that are not well thought out.
The mess we are in now was a combination of a lack of regulation and a lack of oversight. IndyMac failed partly due to the lack of oversight of the Office of Thrift Supervision. Fannie/Freddie Mac took on way too much risk because Congress looked the other way. Now, we do have to think about the unregulated credit default swaps that sunk AIG. We don't need czars, uber-regulators and councils of regulators. We need an overhaul of the existing regulators, staff them properly and monitor their performance more effectively.
Now that my soap box has collapsed, what does this have to do with you? If you rely on credit, you have reason to worry. Credit will be even tougher to obtain and with that the growth of the economy will be anemic. That growth puts money in your pocket and provides a better way of life. This is a dangerous time in our history. During times of crisis, we put in safeguards with the best intentions. History has shown us that time and time again, these safeguards hinder innovation and economic growth.
Stay tuned for my next post as I'll venture into the health care plan and the financial impacts for you.
Friday, June 19, 2009
A Week I won't review ad nauseum
I have been saving my energy for my end of week blog. After I was rear-ended in the Kiss & Go line by a mini-van yesterday, I felt it prudent to cool down before I posted.
Last two posts were about inflation and what is perceived, real and mostly the great unknown. The CPI came out this week for May and it represented the largest 12 month drop in 60 years. As you can discern, there are examples of growing energy and food costs but overall there is no "inflation boogeyman" right now. So what gives?
The economy is in tough shape. The job market is still not recovering as people would have you believe. The unemployment rate is around 9.4% and rising. The housing market is not stabilizing quite yet. The media is gloming on any positive news when it comes to existing home sales to new housing starts but its a hollow strategy. The wonderful news that people would have you believe is that mortgage rates are still at historic lows. That is great if you have a FICO score in the 800s and have over 20% down. Hold tight folks on this recovery. We still have a way to go.
Let's not take my word on this inflation issue. This week two Federal Reserve governors spoke about the inflation fears. Both Janet Yellen (SF Fed pres) and Thomas Koenig (KC Fed pres) referred to it in various speeches. For my audience, the Fed presidents often speak in between FOMC meetings (these are the meetings when all the Fed people talk about interest rates and other issues) to either confirm or dispel the key issues of the Fed. Both expressed concern about the rising yields telling the story of a possibly inflationary period. The FOMC is meeting next week. The market will be focused on the minutes of those meetings and what they say.
Now that I have beat this horse for three posts, I'll leave it alone (for a bit). Stay tuned as I'll focus on what the President and the Treasury Dept are proposing in terms of additional regulation. Its very complex but I'll try to glean it down. Have a great weekend! Now onto my damaged car....
Last two posts were about inflation and what is perceived, real and mostly the great unknown. The CPI came out this week for May and it represented the largest 12 month drop in 60 years. As you can discern, there are examples of growing energy and food costs but overall there is no "inflation boogeyman" right now. So what gives?
The economy is in tough shape. The job market is still not recovering as people would have you believe. The unemployment rate is around 9.4% and rising. The housing market is not stabilizing quite yet. The media is gloming on any positive news when it comes to existing home sales to new housing starts but its a hollow strategy. The wonderful news that people would have you believe is that mortgage rates are still at historic lows. That is great if you have a FICO score in the 800s and have over 20% down. Hold tight folks on this recovery. We still have a way to go.
Let's not take my word on this inflation issue. This week two Federal Reserve governors spoke about the inflation fears. Both Janet Yellen (SF Fed pres) and Thomas Koenig (KC Fed pres) referred to it in various speeches. For my audience, the Fed presidents often speak in between FOMC meetings (these are the meetings when all the Fed people talk about interest rates and other issues) to either confirm or dispel the key issues of the Fed. Both expressed concern about the rising yields telling the story of a possibly inflationary period. The FOMC is meeting next week. The market will be focused on the minutes of those meetings and what they say.
Now that I have beat this horse for three posts, I'll leave it alone (for a bit). Stay tuned as I'll focus on what the President and the Treasury Dept are proposing in terms of additional regulation. Its very complex but I'll try to glean it down. Have a great weekend! Now onto my damaged car....
Friday, June 12, 2009
Inflation is there if you only look
In my last post, I opened up a discussion about the potential for a large problem with inflation. The prevailing wisdom out there is that it won't be a problem until next year and in 2011. Here is a wake up call for you. Did you notice that the cost of a gallon of gasoline has gone up? Hey, what happened? Wasn't it only $2.10 for premium not too long ago?
Some people follow this but some don't. The cost for a barrel of oil was really low not too long ago. I recall it hitting in the $30 range recently. This week, that cost was running around $70 per barrel as a lot of investors are flocking to commodities and think China is recovering. Here is where all of this hits you in the pocket. The cost for a gallon of gasoline (at the wholesale level) in mid-February was $1.15. Now that cost has ballooned to $2.05. Where I live I am paying $2.65 for premium. 60 cents is paying for transportation, taxes and other fees just to get the gas to my pump. Inflation is here if you only look. Since its Friday, I'll keep this post brief. Keep an eye out for those prices!
Stay tuned, my next post will continue this discussion and move into other rising costs.
Some people follow this but some don't. The cost for a barrel of oil was really low not too long ago. I recall it hitting in the $30 range recently. This week, that cost was running around $70 per barrel as a lot of investors are flocking to commodities and think China is recovering. Here is where all of this hits you in the pocket. The cost for a gallon of gasoline (at the wholesale level) in mid-February was $1.15. Now that cost has ballooned to $2.05. Where I live I am paying $2.65 for premium. 60 cents is paying for transportation, taxes and other fees just to get the gas to my pump. Inflation is here if you only look. Since its Friday, I'll keep this post brief. Keep an eye out for those prices!
Stay tuned, my next post will continue this discussion and move into other rising costs.
Wednesday, June 10, 2009
Inflation isn't just for balloons
How does inflation affect me? Why is it so important? In my last post, I briefly discussed the increasing yields for Treasury notes and bonds. Those yields, particularly on the longer maturities (5 years plus) are the markets perception of inflation.
Inflation, as measured in the government's monthly reading called the consumer price index, is basically rising prices. Ever notice that when you didn't get a raise, you actually do get a "cost of living" raise? That raise is correlated to the rate of inflation. The CPI, while not the best or most accurate is the closest index we have to reflecting the price levels in the economy. In 2008, inflation as tested by the CPI was 3.85%. What does that mean? It means on average that the prices you paid for anything rose by 3.85%.
Now, did you get a raise in 2008 of 3.85%? Did your investments gain a return of 3.85% or higher? Most people don't realize that to stay ahead of things, your salary and investments must stay ahead of this rate year after year. $1.00 today won't be worth $1.00 by next year. Some old timers will say its best just to put your money in a mattress and forget about it. Well, believe it or not, there was a story today where someone threw out a mattress that had $1M in it. If that money was put into reasonable investments, it would have been worth a whole lot more. Before you look at your mattress as a safe deposit box, think again.
Is inflation a problem right now? No, it isn't. The question is what happens next year and in 2011, when all of this government stimulus and hopefully improvement in the housing and job market hits. Is that 3.85% rate in 2008 going to balloon up to 7%? Too soon to tell. Hopefully, this blog will make you look at your mattress and balloons for the kids in a different light.
Stay tuned for my next blog when I'll expound on this into specific examples of how inflation hurts you.
Inflation, as measured in the government's monthly reading called the consumer price index, is basically rising prices. Ever notice that when you didn't get a raise, you actually do get a "cost of living" raise? That raise is correlated to the rate of inflation. The CPI, while not the best or most accurate is the closest index we have to reflecting the price levels in the economy. In 2008, inflation as tested by the CPI was 3.85%. What does that mean? It means on average that the prices you paid for anything rose by 3.85%.
Now, did you get a raise in 2008 of 3.85%? Did your investments gain a return of 3.85% or higher? Most people don't realize that to stay ahead of things, your salary and investments must stay ahead of this rate year after year. $1.00 today won't be worth $1.00 by next year. Some old timers will say its best just to put your money in a mattress and forget about it. Well, believe it or not, there was a story today where someone threw out a mattress that had $1M in it. If that money was put into reasonable investments, it would have been worth a whole lot more. Before you look at your mattress as a safe deposit box, think again.
Is inflation a problem right now? No, it isn't. The question is what happens next year and in 2011, when all of this government stimulus and hopefully improvement in the housing and job market hits. Is that 3.85% rate in 2008 going to balloon up to 7%? Too soon to tell. Hopefully, this blog will make you look at your mattress and balloons for the kids in a different light.
Stay tuned for my next blog when I'll expound on this into specific examples of how inflation hurts you.
Wednesday, June 3, 2009
Yields Shmields
What do the Treasury yields have to do with me, you say. I have a trouble rubbing two nickels together, never mind worrying about the budget deficit, national debt and bond yields. Well, think again. The increasing debt burden of the U.S. has a direct effect on American families. How you say?
The federal government is increasingly printing money, yes literally printing money and at the same time is auctioning off Treasury notes and bonds at record pace. What does that mean? If you look at what has happened over the last month or so, the 10 year T-note yield has risen from 2.5% to 3.55% (as of today). The investors who are buying those notes are demanding better returns as they are worried about the inflation and the U.S. growing debt. The 10 year note, dum dum dum, is the benchmark rate for mortgages. It costs you money if you are looking to refi or buy another home. One little watched item is that to keep these yields astronomically low is that the Federal Reserve is buying back the old bonds at the same time they are auctioning off new ones. The buying back is somewhat normal but not at the level they are doing it. I think it was on Friday that 10 year yield was in the 3.71% range.
Now for the right hook to the face; China owns an overwhelming majority of those bonds. They are worried about the US and the value of those bonds. There was a press release reporting that our Treasury Secretary told a Chinese audience that there money was safe invested in the US and there was laughter in the audience. Scary. China has a vested interest in how well we do but they are becoming quite savvy and there could be an unintended shift to another country's debt. The question is who? At this point, no one knows that answer. Next time you scoff about yields, think again.
Stay tuned. My next blog will go into inflation and how putting money under your mattress is the dumbest thing you can do.
The federal government is increasingly printing money, yes literally printing money and at the same time is auctioning off Treasury notes and bonds at record pace. What does that mean? If you look at what has happened over the last month or so, the 10 year T-note yield has risen from 2.5% to 3.55% (as of today). The investors who are buying those notes are demanding better returns as they are worried about the inflation and the U.S. growing debt. The 10 year note, dum dum dum, is the benchmark rate for mortgages. It costs you money if you are looking to refi or buy another home. One little watched item is that to keep these yields astronomically low is that the Federal Reserve is buying back the old bonds at the same time they are auctioning off new ones. The buying back is somewhat normal but not at the level they are doing it. I think it was on Friday that 10 year yield was in the 3.71% range.
Now for the right hook to the face; China owns an overwhelming majority of those bonds. They are worried about the US and the value of those bonds. There was a press release reporting that our Treasury Secretary told a Chinese audience that there money was safe invested in the US and there was laughter in the audience. Scary. China has a vested interest in how well we do but they are becoming quite savvy and there could be an unintended shift to another country's debt. The question is who? At this point, no one knows that answer. Next time you scoff about yields, think again.
Stay tuned. My next blog will go into inflation and how putting money under your mattress is the dumbest thing you can do.
Monday, June 1, 2009
What a day!
Another Monday and yet another big news day. GM filing bankruptcy and the approval of the sale of Chrysler assets to Fiat. The sad part of the GM story is that America is paying through the news to keep this company afloat. I believe the running tally was about $20B sunk into this foundering ship. The PC thing to do was to continue to feed money to this money-sucker and hope, just hope a Chapter 11 didn't come.
Well now, my fellow taxpayers, you own a lot of GM whether you like it or not. GM's problem, IMHO, was that the market made a decision on its products. Once GM got the message, it wasn't nimble nor humble enough to make the necessary changes in its product lineup and more importantly its cost structure. Both management and labor are at fault. A sad casualty of this saga are the lower level workers.
The idea that the government can turn GM around when career automotive executives could not is ludicrous. The reality in today's world is that government can do anything it wants and damn the torpedoes. I wish they would be better stewards of our taxpayer dollars instead of trying to save everybody from everything.
Stay tuned to my next blog about the increasing debt loads and yields and what that means for everybody.
Well now, my fellow taxpayers, you own a lot of GM whether you like it or not. GM's problem, IMHO, was that the market made a decision on its products. Once GM got the message, it wasn't nimble nor humble enough to make the necessary changes in its product lineup and more importantly its cost structure. Both management and labor are at fault. A sad casualty of this saga are the lower level workers.
The idea that the government can turn GM around when career automotive executives could not is ludicrous. The reality in today's world is that government can do anything it wants and damn the torpedoes. I wish they would be better stewards of our taxpayer dollars instead of trying to save everybody from everything.
Stay tuned to my next blog about the increasing debt loads and yields and what that means for everybody.
Thursday, May 28, 2009
Banking Crisis
For the many years I have been in banking, this period is perhaps the most difficult to be lending money to businesses and consumers. Credit officers are under pressure to protect their banks from losses. With that pressure comes tougher structures, higher pricing and tougher approval processes. The loan officer is caught in the middle, between a rock and a hard place. The loan officer is responsible for winning deals, cross-selling, and retaining the existing business. On the other side, their primary responsbility is to protect the bank from taking losses. These two forces often collide together with the bank usually winning. The win comes at a huge price, as the management team and investors of the client feel slighted and wronged. Eventually, the market will turn and the client will soon have the advantage of multiple banks with multiple bids for its business.
If you are a business seeking a loan, keep these ideas in your head when you see a proposal and what is finally approved (if your loan is approved). More thoughts to come on lending from Peter B at Happy Chappy!
If you are a business seeking a loan, keep these ideas in your head when you see a proposal and what is finally approved (if your loan is approved). More thoughts to come on lending from Peter B at Happy Chappy!
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