January, Friday 06, 2012

DOW –55 = 12359
SPX –3 = 1277
NAS  +4 = 2674
10 YR YLD -.03 = 1.96
OIL +.12 = 101.93
GOLD – 4.80 = 1617.60
SILV-.62 = 28.85
PLAT –9.00 = 1407.00

OK, I know the Bureau of Labor Statistics manipulates numbers; I know it looks like the overall labor force is shrinking, and this is the reason the headline unemployment rate dropped in today’s report; I know that if you don’t miscount, the number would really be 11.4% and not 8.5%; and I don’t believe people just drop out of the labor force; and I know there was a freakish gain in new jobs for messengers and couriers and I can’t explain that; and I know the U6 measure of underemployed and marginally employed puts the rate at 15.2%; and I know the non-manipulated number is really closer to 22.4% un-under-marginally-unemployed. Still, today’s monthly jobs report looked pretty good.

The economy added 200,000 jobs in December. The headline unemployment rate dropped to 8.5% from an upwardly revised 8.7% in November. Unemployment has fallen fourth straight months. Over the past six months, the U.S. has added an average of 142,000 jobs, the most job growth in more than six years. Virtually every major industry added jobs and only the government sector cut employment. The private sector added 212,000 jobs in December, offset by a 12,000 drop in government employment, primarily state and local government jobs. we’ve now added 3.2 million new private sector jobs over the last 22 months — nearly 2 million jobs last year alone. It’s not enough; many population groups disproportionately suffer from double-digit unemployment rates, and long-term unemployment is a very nasty problem that nobody wants to address, and job growth is tenuous and we could slip back in a heartbeat, but still, I think the monthly jobs report looks pretty good.

"It's not enough to get a good number. You need a really good number, and we didn't get that today," so said Mohamed El-Erian, co-CEO of Pimco, which runs the largest bond fund in the world.  There is ongoing fear that the US economy isn’t really recovering; there is ongoing fear that Europe could implode; we’ll wake up one day and the Euro economy will just be vaporized.  The truth is that Wall Street really doesn’t like a good jobs number. Wall Street would prefer an accommodative Fed. Wall Street prefers a Federal Reserve that feels compelled to crank up the printing press in response to a weak jobs report. Wall Street loves  the justification a high unemployment rate gives the Fed to shovel money out of the helicopter and make it rain on Wall Street.

There are still a few problems spilling out of Europe. UniCredit, Italy’s largest bank, had to offer more than a 40% discount in an offering to existing shareholders to buy two shares for every one held. That set-off a chain reaction, as the need to raise capital is not restricted to Unicredit, but applies to pretty much every bank in Europe.  As a result, bank stocks plunged throughout the continent and impacted the general markets as well. Interest rates climbed and the Euro broke below $1.28 for the first time since September 2010. In addition the EFSF, The European Fubar Slush Fund,  had to pay much higher rates to sell 3 billion Euros of debt.

That isn’t all. As potential harbingers of things to come, the Spanish regional government of Valencia is a week late in repaying a 123 million Euro loan to Deutsche Bank. Apparently the orange farming has been slack lately.

Quick – can you name the Hungarian currency? If you said “forint”  you are an absolute genius. If you said something else – you might still be pretty smart, don’t’ let it bother you. The forint hit a record low as the cost of insuring Hungarian debt against default rose to a record high for the third consecutive day. Some European banks have large exposures to Hungarian debt.

Countries in Europe need to refinance about $1trillion dollars of debt that matures this year. European banks will need to recapitalize to the tune of about $1 trillion. The Euro economy is slipping into recession and the response has been more and more severe austerity measures, which is like tightening a tourniquet to promote more blood flow.

Last week, the Spanish government enacted a law that allows copyright holders to file a complaint against a website that might allegedly infringe in the copyright, and the allegedly infringing website would be shut down within days. The legislation, which sounds like a more extreme version of the controversial Stop Online Piracy Act (SOPA) being debating in the U.S., had actually already been passed, but wasn't implemented until Spain's new, notably more conservative government took control.

The Sustainable Economy Law, which contains the anti-piracy provisions, was enacted in part to help encourage investment by U.S.-based media and technology companies. Today it was revealed that American interest in the law being enacted may have been more than casual. Spain was actually threatened by the US with being put on a trade blacklist if the law wasn't passed. This revelation comes from newly released cables supplied by Wikileaks. In addition to the WikiLeaks cables, Spanish newspaper El Pais obtained a letter from the U.S. ambassador to Spain expressing "deep concern" over the country's failure to enact the law and suggesting that economic punishment may be in order.

Let’s go to the mail bag:

I have learned that the retail investor is capable of being his own personal financial manager by establishing a financial library consisting of established and respected authors such as Malkiel, Bernstein, Ellis, Bogle, Scott, Hazlitt, to name a few.  In my opinion, a well diversified portfolio consisting of low cost index mutual funds should be the core of one's investment philosophy. Instead of continuously speaking to the "big bad banks" I believe you should alert your listeners to the numerous "bad financial advisers" who are seeking to take " a bite of your wallet".  Knowledge gained by the small retail investor through reading, can go a long way of avoiding "shark attacks".  The most trusted person is the person one looks at in the bathroom mirror namely himself.  Just a thought!

This from another listener:

Vanguard's John Bogle's newest book titled "The Clash of Cultures: Investment
vs Speculation" was mentioned by USA Today about 12-25-2011.    Here is one of his quotes:  "Our markets have gone crazy, and there is 200 times as much speculation as there is investing."

He said it is absolute absurdity for gamblers on Wall Street to pay the same tax rate of 15% as people who start businesses and contribute value to society. When asked about his investment outlook into 2012:  (this is partial) "I don't expect a boom in consumer spending over the next two or three years.  People don't have the wherewithal to spend a lot more, and in today's world, they don't have the confidence.  Confidence can change overnight, but wherewithal cannot."    

    www.usatoday.com/money/perfi/funds/story/2011-12-23/bogle-markets-taxes/52195070/1

John Bogle counted himself among the 1% of wealthiest Americans a couple decades ago. You might not guess that today, when you hear the 82-year-old founder of mutual fund company Vanguard rail against economic inequality.

He can sound almost like an Occupy Wall Streetprotester: "Our markets have gone crazy, and there is 200 times as much speculation as there is investing," he says.

It has been 15 years since the low-cost investing pioneer stepped down as CEO of Vanguard. It was Bogle who launched the first index mutual fund in 1976. Vanguard Group has since grown into the largest fund company, managing nearly $1.7 trillion in U.S. fund assets.

Bogle remains wealthy, but his income is a fraction of what he earned when he ran Vanguard. He's paid a modest retainer to run Vanguard's Bogle Financial Markets Research Center, a think tank in Valley Forge, Pa.

He resists a label that applies to most people his age: "I'm so far from retired, it's almost an embarrassment. I'm here in the office every day." He's also writing his 10th book, "The Clash of Cultures: Investment vs. Speculation." And he continues to deliver speeches.

Bogle says he's paying close attention to tax policies he considers unfair, including one that's favorable to the mutual fund industry and investors with taxable accounts. The top rate for dividends and long-term capital gains is historically low at 15%, as a result of the extension of Bush era tax cuts that Congress and President Barack Obama agreed to a year ago. In contrast, top earners pay 35% on regular income. He doesn't like that disparity.

Here are excerpts from a recent interview with Bogle:

Q: What do you think about the ongoing discussion over tax fairness?

A: I believe the rich should pay more, but that's not a good platform for tax policy. What has gone wrong is that we've failed to recognize the difference between earned income and unearned income. Is it really fair for gamblers on Wall Street to pay a 15% rate when they make a winning investment, and an honest working person — a bricklayer for example — may pay an equal or higher tax on their wages than a gambler? That's absolute absurdity.

Rates may have to be changed, but we also need to look at what is taxed, and how. Dividend income should be taxed at the same rate as ordinary income. As for capital gains, there ought to be some distinction between capital made by people who start businesses, and contribute value to society, and capital made by gamblers on Wall Street, some of whom win. Earned capital income should carry the regular dividend rate, but capital income gains by trading, and particularly short-term trading, should pay a higher tax, even than the present ordinary income rate.

Q: What's your take on the Occupy movement?

A: I'm happy to say that my current income puts me in the 99% group. So maybe I'm not so happy, I don't know.

This movement has brought to the surface some very serious problems in our country about disparities in opportunity and income. So many young people are having a terrible time getting a job.

Young people have great idealism, and the Occupy movement has been a bit unrealistic at times. So what? I can't imagine a worse America if our younger generation didn't have great idealism. I salute them for their enthusiasm, and their mission.

The negative side is that they just pushed too hard for too long. It's very difficult for any movement without any seeming leadership — other than a good idea — to have any sense of taste or judgment. Who's to say, 'This is going too far'? In some places, it's just gone on too long, and it's been too disruptive. So I think it's good that we've been cleaning up the plazas where the Occupy movement set up.

Q: What's the focus of the book you're writing?

A: That our financial system has gone off the rails. It's something we think of as providing capital for new businesses, that will enable people to finance new companies or add to the capital of existing companies. We do that to the tune of about $200 billion a year in financing through Wall Street, or through the financial system. And yet we do some $40 trillion worth of trading every year. I'm selling my investment to you, and you're buying it from me, and it creates no value for society. Indeed, it subtracts value, because the guy in the middle gets his piece.

Many mutual funds turn over 100% of their portfolios each year. When I got into this business, it was maybe 18% a year. It's amazing. This industry is a big part of the problem. What we need is a transfer tax on trading. We need to tame the trading and speculative element in our financial system.

Q: What's your investment outlook heading into 2012?

A: If you're investing in stocks with idea of a one-year outcome, you should not invest. You can lose a lot. If you invest in stocks with a five-year outlook, I would think it is highly debatable if you should do that.

With the economy, I'm cautious. I don't expect a boom in consumer spending over the next two or three years. People don't have the wherewithal to spend a lot more, and in today's world, they don't have the confidence. Confidence can change overnight, but wherewithal cannot.