"Deliberately euphemistic, ambiguous, or obscure language." That's how the dictionary defines the word doublespeak. I came across a good example of it today. Boston Scientific embarked upon a restructuring program in 2011. In the corporate world restructuring is a nice way of saying there will be layoffs. The point of restructuring is to cut expenses usually by consolidating operations, shutting down or selling underperforming businesses, and laying off people--sometimes a lot of people. That in itself is a euphemistic use of the word "restructuring."
But Boston Scientific outdid itself today when it announced plans to expand this restructuring program. It said, "The company anticipates the reduction of 900 to 1,000 positions worldwide through a combination of employee attrition and targeted headcount reductions." So, if you are a corporate PR specialist and you want to come up with a nice and friendly word to describe this initiative, what would you choose? Well someone at Boston Scientific decided to call it an "Expansion." That's right. Even though the only thing being expanded are layoffs and cost cutting, Boston Scientific has officially dubbed this new initiative the Expansion, perhaps hoping that investors will conclude that business is booming.
Don't get me wrong. If management is convinced that this kind of restructuring is necessary for the well being of the corporation and its shareholders then I'm all for it. After all, I am a Boston Scientific shareholder. But I really do not appreciate this thinly veiled attempt to fool investors. By trying to make something bad sound good, the company is simply insulting the intelligence of the investment public. If a restructuring involves cutting costs by eliminating employees and underperforming businesses, even if there are plans to eventually invest the resulting savings into growth initiatives, it is hardly fair to call it an Expansion. This may be what the corporate PR people are paid to do, yet I wonder if the executives at Boston Scientific can actually say Expansion with a straight face.
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Tuesday, January 29, 2013
Wednesday, January 23, 2013
The Can Gets Kicked Again
Every investor knows that the U.S. has some serious economic problems. The government has way too much debt, the budget deficit is huge, economic growth is anemic, and it has been 30 years since the employment participation rate was as low it is now. Yet the stock market is on fire with the S&P 500 and Dow Jones Industrial Average closing in on all-time highs.
The rally in stocks is partly being fueled by the Federal Reserve, which is doing everything it can to provide liquidity and keep interest rates low. Perhaps that's putting it too mildly. The truth is that the economy is drowning in liquidity, yet the Fed continues to buy up bonds as quickly as the Treasury can issue them. The Fed is also buying mortgage-backed securities. These actions, in addition to the the low fed funds rate, are keeping just about all interest rates low, which is exactly what the Fed wants. Low rates make safer investments undesirable. They force investors to consider riskier investments such as stocks. They also make current dividend yields extremely attractive.
The other factor driving stocks higher is Washington. Unfortunately, politicians have learned that they don't actually have to do anything. In fact, they have learned that they can simply push off important decisions. They did it again today by raising the debt ceiling for another four months. Whenever politicians delay an important decision, investors breathe a sigh of relief and stocks move higher. The fiscal cliff, after all, turned out to be a joke. Nothing meaningful was resolved.
While it is true that some companies, such as IBM and Google, are announcing encouraging results, most companies are not really doing very well. Yes, they are beating expectations; but for the most part year-over-year revenue and earnings growth is not strong.
I can't help but worry that such government actions (or inactions to be more exact) are setting us up for another sell-off. While I am not yet ready to take all my money off the table, I do believe it makes sense to use these rallies to pare back on certain positions.
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The rally in stocks is partly being fueled by the Federal Reserve, which is doing everything it can to provide liquidity and keep interest rates low. Perhaps that's putting it too mildly. The truth is that the economy is drowning in liquidity, yet the Fed continues to buy up bonds as quickly as the Treasury can issue them. The Fed is also buying mortgage-backed securities. These actions, in addition to the the low fed funds rate, are keeping just about all interest rates low, which is exactly what the Fed wants. Low rates make safer investments undesirable. They force investors to consider riskier investments such as stocks. They also make current dividend yields extremely attractive.
The other factor driving stocks higher is Washington. Unfortunately, politicians have learned that they don't actually have to do anything. In fact, they have learned that they can simply push off important decisions. They did it again today by raising the debt ceiling for another four months. Whenever politicians delay an important decision, investors breathe a sigh of relief and stocks move higher. The fiscal cliff, after all, turned out to be a joke. Nothing meaningful was resolved.
While it is true that some companies, such as IBM and Google, are announcing encouraging results, most companies are not really doing very well. Yes, they are beating expectations; but for the most part year-over-year revenue and earnings growth is not strong.
I can't help but worry that such government actions (or inactions to be more exact) are setting us up for another sell-off. While I am not yet ready to take all my money off the table, I do believe it makes sense to use these rallies to pare back on certain positions.
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Friday, January 18, 2013
Investors Flock Back to Stocks
Some professionals believe that retail investors are an excellent contrary indicator. They claim it's a good time to buy when the man on the street throws in the towel and vows to stay away from stocks; and it's a good time to sell when retail investors come flocking back into the market. Well, it seems the flocking has begun.
Retail investors have pretty much avoided stocks ever since the financial crisis of 2008. What scared them was the 38.5% decline in the S&P 500 that year. Diversification provided no protection as correlations jumped and everything sold off. But by getting out of the market, they missed the 23.5% rally in 2009 and the 12.8% gain in 2010. The market finished flat in 2011, but there was tremendous volatility. The S&P 500 moved up or down by at least 1% on 69 trading days during the second half of the year alone. Investors, of course, don't like losing money; and they dislike volatility almost as much.
The markets really settled down in 2012 and the S&P 500 climbed 13.4%. It seems that the reduced volatility and the double-digit gain were enough to entice many investors back. U.S. equity funds pulled in $18.3 billion during the first full week of trading this year. That is the fourth largest amount of weekly inflows ever. BlackRock, the world's largest asset manager, saw huge inflows of money into its passively managed equity funds during the fourth quarter of 2012. The pace of inflows has continued into 2013. Some of this is new money, but much of it came out of bond funds; and BlackRock said that at least some of the money came out of actively managed equity funds.
There have been many times in the past when investors got out of bonds and into stocks at the wrong time; but there is something a little different about this rotation. Although investors are flocking back to stocks, they are not interested in making their own picks. Instead, they are going into passively managed index funds, especially exchange-traded funds.
Several years ago I had the privilege of hosting Jack Bogle, founder of The Vanguard Group, for lunch. Mr. Bogle is a long-time advocate for passive investing. Although he isn't fond of ETFs (because he thinks they encourage trading), he must be very pleased with the growing interest in index investing. Let's just hope this rotation is not signalling another market top.
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Retail investors have pretty much avoided stocks ever since the financial crisis of 2008. What scared them was the 38.5% decline in the S&P 500 that year. Diversification provided no protection as correlations jumped and everything sold off. But by getting out of the market, they missed the 23.5% rally in 2009 and the 12.8% gain in 2010. The market finished flat in 2011, but there was tremendous volatility. The S&P 500 moved up or down by at least 1% on 69 trading days during the second half of the year alone. Investors, of course, don't like losing money; and they dislike volatility almost as much.
The markets really settled down in 2012 and the S&P 500 climbed 13.4%. It seems that the reduced volatility and the double-digit gain were enough to entice many investors back. U.S. equity funds pulled in $18.3 billion during the first full week of trading this year. That is the fourth largest amount of weekly inflows ever. BlackRock, the world's largest asset manager, saw huge inflows of money into its passively managed equity funds during the fourth quarter of 2012. The pace of inflows has continued into 2013. Some of this is new money, but much of it came out of bond funds; and BlackRock said that at least some of the money came out of actively managed equity funds.
There have been many times in the past when investors got out of bonds and into stocks at the wrong time; but there is something a little different about this rotation. Although investors are flocking back to stocks, they are not interested in making their own picks. Instead, they are going into passively managed index funds, especially exchange-traded funds.
Several years ago I had the privilege of hosting Jack Bogle, founder of The Vanguard Group, for lunch. Mr. Bogle is a long-time advocate for passive investing. Although he isn't fond of ETFs (because he thinks they encourage trading), he must be very pleased with the growing interest in index investing. Let's just hope this rotation is not signalling another market top.
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Sunday, January 13, 2013
Rudisha Wins Top Honor
Track & Field News magazine just came out with its selections for male and female Athletes of the Year. (Yes, I know this has nothing to do with the economy or the markets, but I love the sport of track and field, or athletics as the rest of the world calls it, as much as I love investing.) On the men's side, they selected David Rudisha of Kenya. I could not agree more. Readers may recall that I said in my July 31, 2012 post that if I had to bet on just one athlete to win a gold medal in the London Olympics, Rudisha would be the man.
Not only did he win that gold medal, he also broke his own world record in the process, setting a new record in the remarkable time of 1:40.91. In fact, Rudisha ran a flawless race, leading from start to finish. He went through the opening 400 meters in under 50 seconds, an absolutely blistering pace. Anyone who has ever run a lap on a track knows how difficult it is to break 50 seconds. Imagine having to immediately follow that with a second lap at about the same pace.
Rudisha's selection was somewhat controversial. I know some track fans would have preferred Usain Bolt (who won three gold medals in London), Ashton Eaton (who dominated the Decathlon), or Mo Farah (who won both the 5,000 meters and 10,000 meters, a grueling combination). They are all outstanding athletes. It is a difficult choice, yet Rudisha deserves the honor. As Track & Field News Editor Gary Hill explained, "Voting members are big on individual achievement." In other words, they discount the relays and they pay a lot of attention to world records. Rudisha was the only top athlete to have an outstanding season and to win a gold medal and set a world record at the Olympic Games.
In fact, Rudisha has dominated the 800 meters for several years. This is the fourth year in a row he was given the top honor by Track & Field News. Yet the man turned 24 years old just last month. He has many great races ahead of him. The competition, however, is right on his heels. The silver medalist in London, Nijel Amos of Botswana finished only 0.82 seconds behind Rudisha. Amos was just 18 years old during the Games. The bronze medalist, Mohamed Aman of Ethiopia, was 20 years old during the Games. There are two additional top-ranked Kenyan two-lappers who are currently 18 years old. A third is only 19. This means the 800 meters is going to give track fans a lot to look forward to in coming years. I really don't think it will be long before someone runs the race in under 1:40, a barrier that not too long ago seemed impossible to break.
On the women's side, the magazine selected Valerie Adams, a shot putter from New Zealand. This decision was less controversial. Adams had an undefeated season and held 16 of the longest tosses of the year. Adams beat out British heptathlete Jessica Ennis, American sprinter Allyson Felix, and Australian hurdler Sally Pearson.
Thanks for bearing with me. I promise to get back to financial matters in the near future.
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Friday, January 11, 2013
A Disconnect Between Housing and Jobs
There is plenty of evidence as of late that the housing market is improving. Sales and prices for both new and existing homes are on the rise. Since housing starts remain below trend and since household formation is growing, one could reasonably surmise that the recent improvements in the housing market are poised to continue.
However, the fate of the housing market is closely tied to the employment market. People are more likely to buy homes if they are employed and if they feel secure in their jobs. No matter how low mortgage rates go, people don't buy homes if they fear that they might get fired in the near future.
This is why the recent improvements in the housing market are a bit perplexing. Yes, the unemployment rate is falling, but the employment participation rate shows no sign of improvement. In addition, initial jobless claims are still too high and the gains in nonfarm payrolls are too low.
The recent announcements out of American Express and Morgan Stanley add to the worries about jobs. American Express said it plans to reduce head count by 5,400. That's equivalent to 8.5% of its workforce. Morgan Stanley will eliminate 1,600 jobs, about 3% of its total workforce. This is on top of a 6% workforce reduction in 2012.
The fact that these two major companies are still trying to reduce costs by reducing head count means that they are not particularly optimistic about their prospects for growth in the near future. For them, the economy still feels like it is in a recession. Because both American Express and Morgan Stanley are in the financial services industry, there might be a tendency on the part of some analysts to hope that their problems are isolated. I don't agree with this assessment. If the economy were truly improving, I would expect to see stronger growth from these kinds of firms. As for the housing market, the recent signs of strength cannot continue if major employers keep cutting their ranks.
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However, the fate of the housing market is closely tied to the employment market. People are more likely to buy homes if they are employed and if they feel secure in their jobs. No matter how low mortgage rates go, people don't buy homes if they fear that they might get fired in the near future.
This is why the recent improvements in the housing market are a bit perplexing. Yes, the unemployment rate is falling, but the employment participation rate shows no sign of improvement. In addition, initial jobless claims are still too high and the gains in nonfarm payrolls are too low.
The recent announcements out of American Express and Morgan Stanley add to the worries about jobs. American Express said it plans to reduce head count by 5,400. That's equivalent to 8.5% of its workforce. Morgan Stanley will eliminate 1,600 jobs, about 3% of its total workforce. This is on top of a 6% workforce reduction in 2012.
The fact that these two major companies are still trying to reduce costs by reducing head count means that they are not particularly optimistic about their prospects for growth in the near future. For them, the economy still feels like it is in a recession. Because both American Express and Morgan Stanley are in the financial services industry, there might be a tendency on the part of some analysts to hope that their problems are isolated. I don't agree with this assessment. If the economy were truly improving, I would expect to see stronger growth from these kinds of firms. As for the housing market, the recent signs of strength cannot continue if major employers keep cutting their ranks.
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Wednesday, January 09, 2013
Torturing the Data
I get a kick out of so-called indicators that are supposed to predict how the stock market will do. I just read about one called the "First Five Days" indicator. This one supposedly predicts that stocks will rise for the full year if they are up during the first five trading days of that year. Since there are 252 trading days in 2013, I suppose this is better than the "First 250 Days" indicator.
The Super Bowl indicator predicts an up year if a team from the old NFL wins the Super Bowl. Some investors rely on astronomy to help them decide how to position their portfolios. Others rely on weather.
About 20 years ago one of the most prestigious academic journals in economics published a paper that supposedly proved that stocks are more likely to rise on days that are sunny in New York City than on days that are rainy. The theory is that weather affects the mood of traders. It isn't entirely clear why the weather in New York City would affect the mood of a trader in Dallas or San Francisco, but that's the theory. In any case, according to the author, the statistics supported the theory. However, the results could simply be a statistical anomaly. After all, stocks go up more often than they go down and, on average, there more sunny days than rainy days in New York City.
These indicators remind me of what one of my favorite statistics professors in graduate school used to say, "If you torture the data long enough, it will confess."
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The Super Bowl indicator predicts an up year if a team from the old NFL wins the Super Bowl. Some investors rely on astronomy to help them decide how to position their portfolios. Others rely on weather.
About 20 years ago one of the most prestigious academic journals in economics published a paper that supposedly proved that stocks are more likely to rise on days that are sunny in New York City than on days that are rainy. The theory is that weather affects the mood of traders. It isn't entirely clear why the weather in New York City would affect the mood of a trader in Dallas or San Francisco, but that's the theory. In any case, according to the author, the statistics supported the theory. However, the results could simply be a statistical anomaly. After all, stocks go up more often than they go down and, on average, there more sunny days than rainy days in New York City.
These indicators remind me of what one of my favorite statistics professors in graduate school used to say, "If you torture the data long enough, it will confess."
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Thursday, January 03, 2013
Feldstein Says The Fed Is Blowing It
I want to call your attention to an interesting op-ed written in today's Wall Street Journal by Martin Feldstein, a noted economist and professor at Harvard University. Feldstein argues that the Federal Reserve's easy-money policies are setting the economy up for more difficult times in the future. Feldstein warns that interest rates will surge when the Fed stops buying all those Treasury and mortgage-backed securities, which it eventually must. He further argues that the Fed's policies are inflationary. Because the banks have much more reserves than they are legally required to hold, inflation will rise once they start lending the money aggressively in response to aggregate demand. In addition, the Fed's dual mandate (i.e., price stability and full employment) will prevent it from acting quickly enough to stem inflation. Finally, Feldstein argues that the Fed's policies take the heat off Congress by allow it to ignore the serious problems of high debt and large deficits that plague our economy. The longer these problems are ignored, the more difficult they will be to fix.
Wednesday, January 02, 2013
Not Perfect But Better Than Nothing
Well folks, a deal to avert the fiscal cliff has been struck and, at least for today, investors are celebrating. Not surprisingly, the deal is flawed, but it is better than no deal at all. And the resolution, if it can be called that, proves one thing. Politicians will wait until the very last second before doing something. In this case, they waited even a little longer.
The big news is that tax rates will not go up as much as they would have gone up if no deal had been reached. But the fact that rates are going up at all is not good news. The top income tax rate (singles earning more than $400,000 or couples earning more than $450,000) goes from 35% to 39.6%. However, due to limitations on exemptions and deductions, it effectively goes well above 40%. The top rate on dividends and long-term capital gains goes from 15% to 20%. But due to a new health care related tax on investment income, it actually goes up to 23.8%. Working people making modest amounts of income, even those who pay no federal income tax at all, will see a significant increase in payroll taxes. And let's not forget the 2.3% excise tax (i.e., a tax on sales, not income) that will hit medical device makers.
If there is one thing we know for sure it is that taxes affect behavior. If you want less of something, all you have to do is tax it. Cigarettes provide a great example. Many states jacked up taxes on tobacco for two reasons: They wanted to raise revenue and they wanted people to smoke less. In fact, what happened was that so many people gave up smoking that revenues fell well short of targets.
Nonetheless, the fiscal cliff deal that passed both the Senate and House was about the best we could hope for at this time. Investors are right to celebrate today by driving up stock prices. Unfortunately, the rally may not last. After all, Congress didn't really do anything to address spending. In just a few short months we'll be facing more crises as we approach the debt ceiling and the sequester (i.e., mandatory spending cuts). Furthermore, as all adults in Washington know, entitlement reform is the only way to get this country back on a path toward fiscal responsibility. That means Medicare and Social Security. After all, there is no point worrying about a leaky toilet if your house is also infested with termites. Washington needs to focus on the big things that really matter.
Finally, I'll call your attention to a recent mention in Investor's Business Daily. I was asked to name my favorite exchange-traded fund for 2013. Thanks to low fees and a big exposure to Apple, I picked the Vanguard Information Technology ETF (VGT).
The big news is that tax rates will not go up as much as they would have gone up if no deal had been reached. But the fact that rates are going up at all is not good news. The top income tax rate (singles earning more than $400,000 or couples earning more than $450,000) goes from 35% to 39.6%. However, due to limitations on exemptions and deductions, it effectively goes well above 40%. The top rate on dividends and long-term capital gains goes from 15% to 20%. But due to a new health care related tax on investment income, it actually goes up to 23.8%. Working people making modest amounts of income, even those who pay no federal income tax at all, will see a significant increase in payroll taxes. And let's not forget the 2.3% excise tax (i.e., a tax on sales, not income) that will hit medical device makers.
If there is one thing we know for sure it is that taxes affect behavior. If you want less of something, all you have to do is tax it. Cigarettes provide a great example. Many states jacked up taxes on tobacco for two reasons: They wanted to raise revenue and they wanted people to smoke less. In fact, what happened was that so many people gave up smoking that revenues fell well short of targets.
Nonetheless, the fiscal cliff deal that passed both the Senate and House was about the best we could hope for at this time. Investors are right to celebrate today by driving up stock prices. Unfortunately, the rally may not last. After all, Congress didn't really do anything to address spending. In just a few short months we'll be facing more crises as we approach the debt ceiling and the sequester (i.e., mandatory spending cuts). Furthermore, as all adults in Washington know, entitlement reform is the only way to get this country back on a path toward fiscal responsibility. That means Medicare and Social Security. After all, there is no point worrying about a leaky toilet if your house is also infested with termites. Washington needs to focus on the big things that really matter.
Finally, I'll call your attention to a recent mention in Investor's Business Daily. I was asked to name my favorite exchange-traded fund for 2013. Thanks to low fees and a big exposure to Apple, I picked the Vanguard Information Technology ETF (VGT).
Wednesday, December 26, 2012
More Good News About Housing
The economy continues to struggle in many respects, but housing has been one bright spot in recent months. The S&P/Case-Shiller numbers for October were announced today and they provided more evidence that demand for existing homes is strengthening. The 20-City Composite Index showed only a slight rise in prices from September to October, but prices were up a robust 4.3% on a year-over-year basis. They are up 5.4% from the low set in January 2012.
Of course, much of the demand is coming from investors who see an opportunity to buy homes at rock-bottom prices. However, a good portion of the demand is coming from genuine would-be residents. After all, there is a lot of pent-up demand. Furthermore, housing is closely tied to employment. People don't rush out and buy homes if they think they might get laid off in the near future. Keep in mind that the numbers released today are lagged by two months so we don't really know how good (or bad) the housing market was in November and December. Yet I can't help but get a bit enthusiastic about the employment market and the overall economy based on these latest results. Now if we could just get our fiscal house in order, 2013 could turn out to be a pretty good year.
Of course, much of the demand is coming from investors who see an opportunity to buy homes at rock-bottom prices. However, a good portion of the demand is coming from genuine would-be residents. After all, there is a lot of pent-up demand. Furthermore, housing is closely tied to employment. People don't rush out and buy homes if they think they might get laid off in the near future. Keep in mind that the numbers released today are lagged by two months so we don't really know how good (or bad) the housing market was in November and December. Yet I can't help but get a bit enthusiastic about the employment market and the overall economy based on these latest results. Now if we could just get our fiscal house in order, 2013 could turn out to be a pretty good year.
Monday, December 24, 2012
Political Dysfunction Remains Primary Risk
With 2012 drawing to a close, it is really difficult to believe that American politicians have yet to resolve the fiscal cliff. Just a few years ago my good friend Ian Bremmer of the Eurasia Group identified political risk as his greatest concern. Unfortunately, that's even truer today.
Washington has become completely dysfunctional. In addition to the fiscal cliff, the country is once again coming close to the debt ceiling. A failure to resolve both issues could result in another round of credit rating downgrades. As bad as that sounds, it's not clear what the consequences will be. The last time our credit rating was reduced, Treasury interest rates went even lower.
No doubt the dysfunction in Washington will cause increased volatility in stocks. To a large extent, retail investors have reduced their holdings of equities. The financial crisis of 2008 was so traumatic that many of them got out and stayed out. However, another round of heavy selling, if it occurs, should be viewed as an opportunity for long term investors to get back into the market.
Finally, as the year draws to a close, I'd like to wish all my blog subscribers a happy holiday season and a prosperous 2013. And keep your eyes open for some changes to this blog. I am planning a revamp that should be ready to roll out in another month or so.
Washington has become completely dysfunctional. In addition to the fiscal cliff, the country is once again coming close to the debt ceiling. A failure to resolve both issues could result in another round of credit rating downgrades. As bad as that sounds, it's not clear what the consequences will be. The last time our credit rating was reduced, Treasury interest rates went even lower.
No doubt the dysfunction in Washington will cause increased volatility in stocks. To a large extent, retail investors have reduced their holdings of equities. The financial crisis of 2008 was so traumatic that many of them got out and stayed out. However, another round of heavy selling, if it occurs, should be viewed as an opportunity for long term investors to get back into the market.
Finally, as the year draws to a close, I'd like to wish all my blog subscribers a happy holiday season and a prosperous 2013. And keep your eyes open for some changes to this blog. I am planning a revamp that should be ready to roll out in another month or so.
Friday, December 21, 2012
Nice mention in MarketWatch article on changing demographics and companies that could thrive and falter as the population ages. Click here to read.
Saturday, December 15, 2012
Fox Interview Overshadowed by Tragedy
I went to the Fox studios in New York City yesterday to do an interview about how lower trading costs have driven small investors out of the market. On the way, I received a news alert on my phone about a shooting at a school in Connecticut. When my interview with Lauren Simonetti was about to begin, there were still no reports of any deaths.
After the interview, I had to rush off to a two-hour meeting. Then I jumped on the subway for another meeting at the Forbes building on lower Fifth Avenue. That's when I learned about the full scope of the tragedy. There are many heinous crimes, but I can't imagine anything worse than this. I hope there is a special place reserved in Hell for those who intentionally harm children.
Compared to what happened in Sandy Hook, our discussion was all but meaningless. Nonetheless, anyone interested in watching can click here.
Compared to what happened in Sandy Hook, our discussion was all but meaningless. Nonetheless, anyone interested in watching can click here.
Tuesday, December 11, 2012
Workers' Rights
The "right-to-work" debate going on in Michigan struck a nerve with me. If you haven't been following the story, Republican Governor Rick Snyder plans to sign legislation that would prevent workers from having to join a union or pay dues to a union even if they do not join. In other words, he is in favor of giving workers choice. The unions, however, oppose choice.
I have never been a union member, but I was twice asked to join. The first time was when I was in college (a long, long time ago). I financed my senior year in part by driving a school bus on a part-time basis. I woke up at 5:30 in the morning, rode my bike to the school bus parking lot, and clocked in by 6:30. I drove kids from kindergarten to high school until 9 am. I then rode home, ate something, got in the car, and drove to Villanova University where I had arranged my classes so I could return to work by 3 pm for the afternoon shift. I drove the school bus a total of five hours a day and I earned just over $4 per hour (almost twice the minimum wage at the time).
I was eventually approached by a union representative. I was told (not asked) that I had to join the union. I was told that the union would negotiate for better wages and benefits on my behalf, and in return, I had to pay dues, which would eat up a good portion of my part-time wages. I quickly realized that my arm was being figuratively, yet vigorously, twisted. I managed to avoid joining the union by explaining that I was going to quit the job in a few months as soon as I finished college.
The second "invitation" to join a union came seven years later when I became a university professor. Once again, I was approached by a union representative, but this time the pressure was much more subtle. I again refused to join. I reasoned that if ever I was unhappy with my compensation, I could ask for a raise. If that didn't work, I could seek employment elsewhere. And if I could not find a better paying job, well then I must have overestimated my worth.
It's not that I am so opposed to unions. I actually think they played a critical role in the development of workers' rights, and even today, they sometimes provide a useful service. I am opposed, however, to the concept of forced membership. If someone wants to join a union then by all means let them; but if they don't want to join, leave them alone. No one should be denied employment or harassed on the job because they refused to join a union. This is what the debate in Michigan is all about. Unions want to be able to force membership, or at the very least, to force even non-members to pay union dues. This is akin to extortion and it simply does not pass the smell test.
I have never been a union member, but I was twice asked to join. The first time was when I was in college (a long, long time ago). I financed my senior year in part by driving a school bus on a part-time basis. I woke up at 5:30 in the morning, rode my bike to the school bus parking lot, and clocked in by 6:30. I drove kids from kindergarten to high school until 9 am. I then rode home, ate something, got in the car, and drove to Villanova University where I had arranged my classes so I could return to work by 3 pm for the afternoon shift. I drove the school bus a total of five hours a day and I earned just over $4 per hour (almost twice the minimum wage at the time).
I was eventually approached by a union representative. I was told (not asked) that I had to join the union. I was told that the union would negotiate for better wages and benefits on my behalf, and in return, I had to pay dues, which would eat up a good portion of my part-time wages. I quickly realized that my arm was being figuratively, yet vigorously, twisted. I managed to avoid joining the union by explaining that I was going to quit the job in a few months as soon as I finished college.
The second "invitation" to join a union came seven years later when I became a university professor. Once again, I was approached by a union representative, but this time the pressure was much more subtle. I again refused to join. I reasoned that if ever I was unhappy with my compensation, I could ask for a raise. If that didn't work, I could seek employment elsewhere. And if I could not find a better paying job, well then I must have overestimated my worth.
It's not that I am so opposed to unions. I actually think they played a critical role in the development of workers' rights, and even today, they sometimes provide a useful service. I am opposed, however, to the concept of forced membership. If someone wants to join a union then by all means let them; but if they don't want to join, leave them alone. No one should be denied employment or harassed on the job because they refused to join a union. This is what the debate in Michigan is all about. Unions want to be able to force membership, or at the very least, to force even non-members to pay union dues. This is akin to extortion and it simply does not pass the smell test.
Thursday, December 06, 2012
Another Reason Why Small Investors Are Staying Away From Stocks
I am in Pittsburgh on business but I saw an interesting article in today's WSJ by Jason Zweig and Tom McGinty about fund managers manipulating stock prices at the end of each quarter by putting in orders to buy stocks they already own. It's an extreme form of window dressing that is illegal. Investor confidence in the integrity of the markets is already low. This doesn't help.
Monday, December 03, 2012
Introducing MM Indicators
Today's Manufacturing ISM report was extremely disappointing, falling below the critical level of 50. Any number below 50 signals contraction in the manufacturing sector of the economy. Today's number (which measures November activity) came in at 49.5, its lowest level since July 2009.
Some time ago, I began tracking a number of economic indicators, including the ISM Index, that I believe provide a good signal of future economic activity. These indicators focus on employment, housing, manufacturing, services, and the stock market. I have been aggregating and quantifying the numbers on a short-term (i.e., month-over-month) basis and long-term (i.e., year-over-year) basis as shown in the table above. Dubbed the MM Indicators, a positive figure indicates improvement in the economy while a negative number indicates deterioration. As the table above shows, in the aggregate, economic indicators are much healthier today than they were a year ago, yet slightly worse than they were in the recent past. The danger, of course, is that prolonged short-term deterioration can turn into a serious long-term problem.
Thursday, November 29, 2012
Gallup Poll Highlights Divergence Between Republicans and Democrats
I know a number of people who have immigrated to the U.S. from former Soviet republics. They lived under socialism and communism in authoritarian countries. They say they came here for freedom, democracy, and capitalism. They often complain that there was little or no incentive to work hard in their home countries because everyone got paid the same. Recall that it was Karl Marx, a proponent of socialism and author of "The Communist Manifesto," who came up with the slogan, "From each according to his ability, to each according to his need."
This morning I heard an interview on National Public Radio (yes, I do listen to NPR) with Frank Newport, Editor in Chief at Gallup. The interview was about a poll Gallup conducted to see how Americans react to certain words. Gallup went a step further. They segmented the results based on political affiliation. The good news is that both Republicans and Democrats had overwhelmingly positive reactions to the terms, "small business," "free enterprise," and "entrepreneurs" with Republicans having a slightly more positive reaction to each.
Here is the worrying part. Republicans had a much stronger positive reaction than Democrats did to the words "capitalism" and "big business," but Democrats had a much stronger positive reaction to the words "federal government" and "socialism." Indeed, three-fourths of Democrats had a positive reaction to "federal government" and more than half had a positive reaction to "socialism." No doubt this comes as a shock to all those immigrants who came to the U.S. to escape the Soviet Union's version of socialism. Click here to see the full Gallup report.
This morning I heard an interview on National Public Radio (yes, I do listen to NPR) with Frank Newport, Editor in Chief at Gallup. The interview was about a poll Gallup conducted to see how Americans react to certain words. Gallup went a step further. They segmented the results based on political affiliation. The good news is that both Republicans and Democrats had overwhelmingly positive reactions to the terms, "small business," "free enterprise," and "entrepreneurs" with Republicans having a slightly more positive reaction to each.
Here is the worrying part. Republicans had a much stronger positive reaction than Democrats did to the words "capitalism" and "big business," but Democrats had a much stronger positive reaction to the words "federal government" and "socialism." Indeed, three-fourths of Democrats had a positive reaction to "federal government" and more than half had a positive reaction to "socialism." No doubt this comes as a shock to all those immigrants who came to the U.S. to escape the Soviet Union's version of socialism. Click here to see the full Gallup report.
Wednesday, November 28, 2012
The Rush for Special Dividends
With fiscal cliff negotiations still going on, one thing is certain. Tax rates on dividends and capital gains will be going up. The only question is by how much. The highest tax rate on qualified dividends is currently 15%, but in 2013, it could jump to as high as 43.4% for the highest income individuals. As a result, even the most anti-tax advocates are willing to settle for a smaller increase. A 20% tax rate on dividends is starting to look pretty good right now.
Yet 20% is still a third higher than the current rate. This is why, in anticipation of higher rates, many companies are announcing special dividends. Special dividends are dividends in addition to regular dividends. However, unlike regular dividends, special dividends are not recurring. The most recently announced special dividend comes from Costco, which said today that it would dole out $7 per share by year-end to stockholders of record December 10. That's in addition to the regular quarterly dividend of 27.5 cents per share. This is a huge payout for a company that is expected to earn about $4.50 per share this fiscal year. There is no doubt that Costco is doing what it can to help its shareholders avoid higher expected taxes in the future.
Costco is not the only company to announce a special dividend. Others include Brown-Forman, Las Vegas Sands, Carnival, Tyson Foods, and Movado. Of course, the elephants in the room are Apple and Microsoft. Both companies sit on vast cash hoards and a lot of people are betting that they, too, will announce a special dividend before long. Higher taxes can be avoided as long as these dividends are paid before year-end. Even though they will taxed at just 15%, the payouts will produce windfall revenues for the government this year.
Tuesday, November 27, 2012
The Norquist Pledge
Contrary to popular belief, the much ballyhooed anti-tax pledge signed by almost all Republicans in Congress, does not begin with the line, "I pledge allegiance to Grover Norquist." Instead, the pledge is a simple document that states that the signer will oppose efforts to increase marginal tax rates and efforts to eliminate deductions or credits that are not matched by decreases in tax rates. Simple enough; yet Norquist and his pledge are being blamed for a failure (so far) to reach agreement on the fiscal cliff. At one time it was thought impossible for a Republican to get elected (or reelected) if he or she refused to sign the pledge or violated the pledge.
It now appears that the tide has turned. Opinion polls strongly suggest Republicans will get the blame if a resolution to the fiscal cliff is not reached. The recent presidential election proved that Republicans were not very good at interpreting polls. They are trying to get better. Several have already said they will not be bound by the pledge. Norquist's stock is falling fast, but only time will tell if these Republicans can get reelected.
By the way, here is a link to my Fox Business interview on the fiscal cliff: The Fiscal Cliff and Your Portfolio
It now appears that the tide has turned. Opinion polls strongly suggest Republicans will get the blame if a resolution to the fiscal cliff is not reached. The recent presidential election proved that Republicans were not very good at interpreting polls. They are trying to get better. Several have already said they will not be bound by the pledge. Norquist's stock is falling fast, but only time will tell if these Republicans can get reelected.
By the way, here is a link to my Fox Business interview on the fiscal cliff: The Fiscal Cliff and Your Portfolio
Friday, November 16, 2012
Some Observations
Everyone is holding their breath, hoping Democrats and Republicans reach an agreement on the fiscal cliff. Today we saw an unusual sight: The majority and minority leaders of both Houses speaking to reporters in a conciliatory manner. It looks like we are getting close to an agreement. Get ready for a big rally when a credible deal is announced.
That's the good news. Here's the bad:
Hurricane Sandy has had a huge negative impact on the economy. It caused a large spike in initial jobless claims and a sharp drop in industrial production. Sandy raises the risk of another recession.
Twinkies are no more. Some of you would say that's good news. After all, there is no nutritional value to those delicious cupcake-like treats. No doubt, Twinkies are the last thing an obese country needs. Hostess, the company that makes Twinkies and other bad-for-you treats, is going out of business. Before you cheer, keep in mind that Hostess runs 33 plants around the country that employ almost 20,000 Americans. Goodbye Twinkies. Goodbye jobs.
Shares of Apple keep plummeting. The company has lost about a quarter of its market capitalization since its September peak. Is this a buying opportunity? It's hard to say no.
America's military leadership is in turmoil; but not because of battles gone wrong. The culprit is sex. Imagine that.
The Middle East is in turmoil. While many in the West celebrated the so-called Arab Spring, Israel's leaders worried more about the instability that it could produce. Indeed, Islamists have gained power and they are proving their credentials by attacking Israel. The bombs are flying and things will likely get worse. How will the Obama administration react? It's still trying to figure out exactly what happened in Benghazi.
That's the good news. Here's the bad:
Hurricane Sandy has had a huge negative impact on the economy. It caused a large spike in initial jobless claims and a sharp drop in industrial production. Sandy raises the risk of another recession.
Twinkies are no more. Some of you would say that's good news. After all, there is no nutritional value to those delicious cupcake-like treats. No doubt, Twinkies are the last thing an obese country needs. Hostess, the company that makes Twinkies and other bad-for-you treats, is going out of business. Before you cheer, keep in mind that Hostess runs 33 plants around the country that employ almost 20,000 Americans. Goodbye Twinkies. Goodbye jobs.
Shares of Apple keep plummeting. The company has lost about a quarter of its market capitalization since its September peak. Is this a buying opportunity? It's hard to say no.
America's military leadership is in turmoil; but not because of battles gone wrong. The culprit is sex. Imagine that.
The Middle East is in turmoil. While many in the West celebrated the so-called Arab Spring, Israel's leaders worried more about the instability that it could produce. Indeed, Islamists have gained power and they are proving their credentials by attacking Israel. The bombs are flying and things will likely get worse. How will the Obama administration react? It's still trying to figure out exactly what happened in Benghazi.
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