Monday, July 9, 2012
Sunday, July 8, 2012
Cutting to the Chase - And - Italy, America's Wakeup Call
I'm just now catching up on the headlines after having been disconnected for a few days. I'm thinking that rather than reading all of the articles and offering up my interpretations, in part one I'll simply cut to the chase and give you my thoughts (one paragraph each), on the first four (economy related) topics based solely on the headlines. In Part Two I hope to touch a nerve.
Part One: Cutting to the Chase
"Job Weakness Starts to Define Landscape of Election Year"
The question is; is it fair to judge a presidency based on the employment experience during its term? Typically no. This time, perhaps. Employment growth typically comes late to a recovery. Employers hold out as long as possible after a recession before adding labor (their largest expense). What's been atypical about this recovery is the palpable uncertainty over future tax rates and regulations. This clearly reflects our lack of leadership. The next question would be; are we talking lack of leadership from the White House or the Hill or both?
"Running Out of Options, Euro Zone May Face a Stark Choice"
Even the measures agreed to during the recent EU summit won't do the trick. I'd place the odds of these "fixes" buying enough time for countries that have been constrained by profligacy and corruption* for decades to grow themselves out of their messes at somewhere between cero and nichts. The "stark choice" being simply: scrap the Euro altogether or do the Eurobond. My money's on the latter.
"Earnings are the Next Big Test for Stocks"
Yep,this week begins Q2 earnings reporting season. Alcoa is the first out of the gate. I have to believe, in light of recent disappointing economic results [globally], that this season may be the worst we've seen in a while. But keep in mind, earnings have been consistently stellar for quite some time. Therefore the 'worst in a while' doesn't mean horrendous. I'm simply guessing (and I do mean guessing) we won't see 80% of the S&P 500 companies blowing away estimates this time around. But if I were a trader (which I'll never be) I'd be more focused on the Fed. The market's begging for yet more easing. That is, QE3.
"Signs We are Approaching a Zombie Economy"
The Fed has pumped a few trillion "into the economy". Well, not exactly. They've pumped a few trillion into bank reserves, and there that few trillion remains (the economy has to come and claim it). And they've lowered interest rates to levels not seen since the fall of Mesopotamia. So then; we have plenty of liquidity, record low interest rates, and sub 2% GDP. Keynesians call this a liquidity trap. I call it palpable uncertainty.
*Part Two: Italy, America's Wakeup Call
(Note: While I entirely sympathize with the following, it is my hope that in our efforts to rein in corporatism that we do not promote yet more business-stifling regulation and collectivist policies here in the United States. Crony capitalism today won't be hindered in the least by giving more power to one of the perpetrators. In fact the exact opposite is what's needed. That is, if we would aim to reduce the politician's power over business we would effectively reduce the incentive for business to capture the politician. The solution is therefore painfully (to the perpetrators) simple: Less government intervention into the economy, close all corporate tax loopholes (while lowering the rates), end all subsidies and tariffs (allowing all the competition the outside world can muster), and absolutely commit that under no circumstances are we to ever again bail out failed institutions (idealistic, I know). Note: not having finished the book, I don't know that Dr. Zingales doesn't draw the same conclusions.)
For a better understanding of why Italy is where it is, here are a few excerpts from University of Chicago Professor Luigi Zingales's recently pubished A Capitalism for the People.
"I came here in 1988 from Italy because I was trying to escape a system that was fundamentally unfair. Italy invented the term nepotism and perfected the concept of cronyism, and it still lives by both. You are promoted by whom you know, not what you know."
"I emigrated to the United States because I realized that it offered me an inestimably brighter future than my native country. And when I got to America in 1988, I wasn't disappointed; I experienced for the first time the inebriating feeling that any goal was within my reach. I had finally arrived in a country where the limits to my dreams were set only by my abilities, not the people I knew."
"Wherever you stand on the political spectrum, whether you're a conservative Republican or a liberal Democrat or somewhere in between, I would gently suggest that you have no idea what it's like to live in a country where there is virtually no meritocracy and competition is considered a sin. Even emergency-room doctors in Italy are promoted on the basis of political affiliation instead of ability. Young people, rather than being told to study, are urged to "carry the bag" (fare il portaborse) for powerful people, in the hope of getting back some favors."
"The best way to get rich is to be politically connected and receive a government contract."
"The only protesters against the system came from the radical Left, which was less interested in changing the system than replacing it with a socialist one. In a country full of privileges based on birth, the Left, instead of fighting for equality of starting points, fought to eliminate all selection mechanisms, viewing them as discriminatory against the have-nots."
"But it wasn't long after arriving in the United States that I began to notice things that felt more like home - as if I were watching a movie I'd seen before. The first case was the 1998 rescue of the largest hedge fund of the time: Long Term Capital Management (LTCM)." "At the time Warren Buffet offered to rescue LTCM, though in a manner that would have cost its owners their entire investment. Instead of allowing that to happen, the Fed stepped in and coordinated a rescue effort that proved more generous to LTCM's investors and managers - a group that happened to include David Mullens, former vice chairman of the Fed." "the Fed had used moral suasion to alter the normal market rules - worse yet, for a friend."
"Under him (GW Bush), the Republican Party moved away from the promarket principles espoused by Ronald Reagan and became increasingly pro-big business, placing a tariff on imported steel in 2002 to protect American manufacturers, for example, and offering corporations special rates to repatriate their profits. At the same time, Democrats were becoming cozier with big-business interests, launching "public-private partnerships," a way to suck money from the government while pretending to do good."
"What I was watching was the transformation of American finance into an Italian-style crony-capitalist system. Indeed, in one way the American situation is worse, since Americans, unlike Italians, cannot place blame on one bad guy. Berlusconi is us. Through our retirement funds and stock investments, we are the owners of the very companies that lobby to grab our tax money and dominate our political life."
"At stake is not just our money but our freedom. Cronyism represses freedom of speech, eliminates the incentive to study, and jeopardizes career opportunities. It has robbed my home country of much of its potential for economic growth. I do not want it to rob the United States as well."`
Part One: Cutting to the Chase
"Job Weakness Starts to Define Landscape of Election Year"
The question is; is it fair to judge a presidency based on the employment experience during its term? Typically no. This time, perhaps. Employment growth typically comes late to a recovery. Employers hold out as long as possible after a recession before adding labor (their largest expense). What's been atypical about this recovery is the palpable uncertainty over future tax rates and regulations. This clearly reflects our lack of leadership. The next question would be; are we talking lack of leadership from the White House or the Hill or both?
"Running Out of Options, Euro Zone May Face a Stark Choice"
Even the measures agreed to during the recent EU summit won't do the trick. I'd place the odds of these "fixes" buying enough time for countries that have been constrained by profligacy and corruption* for decades to grow themselves out of their messes at somewhere between cero and nichts. The "stark choice" being simply: scrap the Euro altogether or do the Eurobond. My money's on the latter.
"Earnings are the Next Big Test for Stocks"
Yep,this week begins Q2 earnings reporting season. Alcoa is the first out of the gate. I have to believe, in light of recent disappointing economic results [globally], that this season may be the worst we've seen in a while. But keep in mind, earnings have been consistently stellar for quite some time. Therefore the 'worst in a while' doesn't mean horrendous. I'm simply guessing (and I do mean guessing) we won't see 80% of the S&P 500 companies blowing away estimates this time around. But if I were a trader (which I'll never be) I'd be more focused on the Fed. The market's begging for yet more easing. That is, QE3.
"Signs We are Approaching a Zombie Economy"
The Fed has pumped a few trillion "into the economy". Well, not exactly. They've pumped a few trillion into bank reserves, and there that few trillion remains (the economy has to come and claim it). And they've lowered interest rates to levels not seen since the fall of Mesopotamia. So then; we have plenty of liquidity, record low interest rates, and sub 2% GDP. Keynesians call this a liquidity trap. I call it palpable uncertainty.
*Part Two: Italy, America's Wakeup Call
(Note: While I entirely sympathize with the following, it is my hope that in our efforts to rein in corporatism that we do not promote yet more business-stifling regulation and collectivist policies here in the United States. Crony capitalism today won't be hindered in the least by giving more power to one of the perpetrators. In fact the exact opposite is what's needed. That is, if we would aim to reduce the politician's power over business we would effectively reduce the incentive for business to capture the politician. The solution is therefore painfully (to the perpetrators) simple: Less government intervention into the economy, close all corporate tax loopholes (while lowering the rates), end all subsidies and tariffs (allowing all the competition the outside world can muster), and absolutely commit that under no circumstances are we to ever again bail out failed institutions (idealistic, I know). Note: not having finished the book, I don't know that Dr. Zingales doesn't draw the same conclusions.)
For a better understanding of why Italy is where it is, here are a few excerpts from University of Chicago Professor Luigi Zingales's recently pubished A Capitalism for the People.
"I came here in 1988 from Italy because I was trying to escape a system that was fundamentally unfair. Italy invented the term nepotism and perfected the concept of cronyism, and it still lives by both. You are promoted by whom you know, not what you know."
"I emigrated to the United States because I realized that it offered me an inestimably brighter future than my native country. And when I got to America in 1988, I wasn't disappointed; I experienced for the first time the inebriating feeling that any goal was within my reach. I had finally arrived in a country where the limits to my dreams were set only by my abilities, not the people I knew."
"Wherever you stand on the political spectrum, whether you're a conservative Republican or a liberal Democrat or somewhere in between, I would gently suggest that you have no idea what it's like to live in a country where there is virtually no meritocracy and competition is considered a sin. Even emergency-room doctors in Italy are promoted on the basis of political affiliation instead of ability. Young people, rather than being told to study, are urged to "carry the bag" (fare il portaborse) for powerful people, in the hope of getting back some favors."
"The best way to get rich is to be politically connected and receive a government contract."
"The only protesters against the system came from the radical Left, which was less interested in changing the system than replacing it with a socialist one. In a country full of privileges based on birth, the Left, instead of fighting for equality of starting points, fought to eliminate all selection mechanisms, viewing them as discriminatory against the have-nots."
"But it wasn't long after arriving in the United States that I began to notice things that felt more like home - as if I were watching a movie I'd seen before. The first case was the 1998 rescue of the largest hedge fund of the time: Long Term Capital Management (LTCM)." "At the time Warren Buffet offered to rescue LTCM, though in a manner that would have cost its owners their entire investment. Instead of allowing that to happen, the Fed stepped in and coordinated a rescue effort that proved more generous to LTCM's investors and managers - a group that happened to include David Mullens, former vice chairman of the Fed." "the Fed had used moral suasion to alter the normal market rules - worse yet, for a friend."
"Under him (GW Bush), the Republican Party moved away from the promarket principles espoused by Ronald Reagan and became increasingly pro-big business, placing a tariff on imported steel in 2002 to protect American manufacturers, for example, and offering corporations special rates to repatriate their profits. At the same time, Democrats were becoming cozier with big-business interests, launching "public-private partnerships," a way to suck money from the government while pretending to do good."
"What I was watching was the transformation of American finance into an Italian-style crony-capitalist system. Indeed, in one way the American situation is worse, since Americans, unlike Italians, cannot place blame on one bad guy. Berlusconi is us. Through our retirement funds and stock investments, we are the owners of the very companies that lobby to grab our tax money and dominate our political life."
"At stake is not just our money but our freedom. Cronyism represses freedom of speech, eliminates the incentive to study, and jeopardizes career opportunities. It has robbed my home country of much of its potential for economic growth. I do not want it to rob the United States as well."`
Tuesday, July 3, 2012
Sheriff Andy Taylor on The American Revolution (video)
Andy Griffith passed away today at his home on Roanoke Island, NC at the age of 86. Oh I loved his style as Mayberry Sheriff Andy Taylor.
http://youtu.be/3boDX-3iRJg
http://youtu.be/3boDX-3iRJg
Who's to Blame, the Cheating Spouse or the Home-Wrecker?
Joseph Stiglitz, the Nobel Laureate economist, is a champion for big government and equality of outcomes. In a recent interview with CNBC, he railed against the rent-seeking activities of large financial institutions (I totally sympathize) and suggests that adding yet more regulations is the answer (I totally reject). He doesn't seem to get that rent-seeking, from wherever (corporations, unions, environmental activists), is a byproduct of big government. The more influence political actions have over industry, over the economy, the more the incentive to lobby favor.
I can write volumes on why government is the chief source of our modern-day woes, and cite instances of cronyism (from both sides of the aisle), throughout our entire history, that would make your blood boil. But for today I'll simply dispel Dr. Stiglitz notion that the repeal of Glass-Steagall set the stage for the 2008 credit crisis.
In a nutshell: The Glass-Steagall Act of 1933 restricted banks to simply banking. That is, commercial banks could not do investment banking, and vice versa. University of Chicago's Luigi Zingales in his book A Capitalism for the People states "One beneficial side effect of the Glass-Steagall Act, as with most of the other banking regulations, was to fragment the banking sector and reduce the financial industry's political power."
Glass-Steagall's dismantling came gradually from the '70s on. State restrictions on branching were the first to go. In essence, banks, under Glass-Steagall, were constrained in terms of branching throughout the states. But it took the Gramm-Leach-Bliley Act of 1999 to finally remove the separation between commercial and investment banks. And you can bet your bank account that G-L-B was inspired by heavy lobby from the financial industry. As Zingales points out (I paraphrase), 'the alignment of all the major players in the financial industry amplified their ability to influence policy.' It's therefore easy to understand why the Stiglitz's of the world are crying foul - and, in many ways, rightfully so.
But here's the thing, make that a couple things: One; suffice it to say (as I did above) that the larger the government, the larger the lobby. And the more successful the lobby, the larger the lobbying entity or industry. But where should we focus ourattention anger; on the CEO or the Congressman? The CEO is forever courting the congressman and vice versa. But we (the people) hired the congressman. I'm thinking he's the one we need to kick in the rear. Seriously, when a spouse cheats, whom do you blame - the spouse or the "home-wrecker"? The spouse, not the home-wrecker, took the vow. The cheater therefore is the spouse (the congressman). And two; contrary to Stiglitz's claims; the repeal of Glass-Steagall, some would say, ultimately saved us from the next Great Depression. Per Zingales:
"The apex of this process of deregulation and consolidation was the 1999 passage of the Gramm-Leach-Bliley Act, which completely removed Glass-Steagall's separation between commercial and investment banks. Gramm-Leach-Bliley has been wrongly accused of playing a major role in the 2008 financial crisis; in fact, it had almost nothing to do with it. The major institutions that failed or were bailed out during the crisis were either pure investment banks that did not take advantage of the repeal of Glass-Steagall (e.g., Lehman Brothers, Bear Stearns, and Merrill Lynch) or purely commercial banks (e.g., Wachovia and Washington Mutual). The only exception was Citigroup*, which had merged its commercial and investment operations even before the Gramm-Leach-Bliley Act, betting that the law would be changed."
*By the way, Robert Rubin took a high paying position at Citi immediately following his term as Treasury Secretary (one of those blood-boiling incidents).
Thus, on the surface, the repeal of Glass-Steagall had virtually nothing to do with the '08 meltdown. The opinion that the repeal indeed saved the system stems from the fact that, with the exception of Lehman, the failed companies were taken over by the likes of JP Morgan, a company that took full advantage (combined commercial with investment banking) of Glass-Steagall's repeal. As opposed to outright failing and (like Lehman) dumping their garbage all over the credit markets.
I could be inclined to argue against Zingales' position, and say that Glass-Steagall's repeal in fact contributed greatly to the crisis, in that it allowed financial institutions to behemothize themselves - making them too big to fail. But here's the thing, "we" bailed out the little guys (the purely investment banks and the purely commercial banks). If even the little guys were deemed too big to fail, it clearly was not the result of Glass-Steagall.
Lastly: Consider the sheer volume of today's regulations. Per Zingales: "In 2010 we saw the passage The Dodd-Frank financial-reform bill, which was a staggering 2,319 pages long. Things were not always this way. The Glass-Steagall Act, which in 1933 separated investment banking from commercial banking, was just thirty-seven pages long. The act that created the Federal Reserve in 1913 ran to thirty-one pages. Even the recent Sarbanes-Oxley Act, which was written in response to the Enron and Worldcom scandals, was only sixty-six pages long. Tellingly, the Dodd-Frank bill was popularly called the "Lawyers' and Consultants' Full Employment Act of 2010." It may well have created more jobs than Obama's original 2009 stimulus package did.
Each page of regulation probably provides a year's worth of employment for several lobbyists and a couple lawyers and economists. This gigantic waste is never properly factored into our economic analysis. But the biggest cost is the smokescreen that overregulation creates. For centuries, in Continental Europe, laws were written in Latin, a language that ordinary citizens could not understand. As institutions were democratized, laws started being written in the vernacular. Overabundant regulation and the legalese that it is written in, achieves the same goal as Latin once did: to confuse the public."When I was writing regulations," says one retired EPA regulator, "I was told on more than one occasion to make sure I put in enough loopholes. The purpose of the complexity is to hide the loopholes.""
Again, the bigger the government, the more complex the regulations, the bigger the confusion, the bigger the cronyism. Clearly we have to turn our attention to the source, the adulterer—the politician.
I can write volumes on why government is the chief source of our modern-day woes, and cite instances of cronyism (from both sides of the aisle), throughout our entire history, that would make your blood boil. But for today I'll simply dispel Dr. Stiglitz notion that the repeal of Glass-Steagall set the stage for the 2008 credit crisis.
In a nutshell: The Glass-Steagall Act of 1933 restricted banks to simply banking. That is, commercial banks could not do investment banking, and vice versa. University of Chicago's Luigi Zingales in his book A Capitalism for the People states "One beneficial side effect of the Glass-Steagall Act, as with most of the other banking regulations, was to fragment the banking sector and reduce the financial industry's political power."
Glass-Steagall's dismantling came gradually from the '70s on. State restrictions on branching were the first to go. In essence, banks, under Glass-Steagall, were constrained in terms of branching throughout the states. But it took the Gramm-Leach-Bliley Act of 1999 to finally remove the separation between commercial and investment banks. And you can bet your bank account that G-L-B was inspired by heavy lobby from the financial industry. As Zingales points out (I paraphrase), 'the alignment of all the major players in the financial industry amplified their ability to influence policy.' It's therefore easy to understand why the Stiglitz's of the world are crying foul - and, in many ways, rightfully so.
But here's the thing, make that a couple things: One; suffice it to say (as I did above) that the larger the government, the larger the lobby. And the more successful the lobby, the larger the lobbying entity or industry. But where should we focus our
"The apex of this process of deregulation and consolidation was the 1999 passage of the Gramm-Leach-Bliley Act, which completely removed Glass-Steagall's separation between commercial and investment banks. Gramm-Leach-Bliley has been wrongly accused of playing a major role in the 2008 financial crisis; in fact, it had almost nothing to do with it. The major institutions that failed or were bailed out during the crisis were either pure investment banks that did not take advantage of the repeal of Glass-Steagall (e.g., Lehman Brothers, Bear Stearns, and Merrill Lynch) or purely commercial banks (e.g., Wachovia and Washington Mutual). The only exception was Citigroup*, which had merged its commercial and investment operations even before the Gramm-Leach-Bliley Act, betting that the law would be changed."
*By the way, Robert Rubin took a high paying position at Citi immediately following his term as Treasury Secretary (one of those blood-boiling incidents).
Thus, on the surface, the repeal of Glass-Steagall had virtually nothing to do with the '08 meltdown. The opinion that the repeal indeed saved the system stems from the fact that, with the exception of Lehman, the failed companies were taken over by the likes of JP Morgan, a company that took full advantage (combined commercial with investment banking) of Glass-Steagall's repeal. As opposed to outright failing and (like Lehman) dumping their garbage all over the credit markets.
I could be inclined to argue against Zingales' position, and say that Glass-Steagall's repeal in fact contributed greatly to the crisis, in that it allowed financial institutions to behemothize themselves - making them too big to fail. But here's the thing, "we" bailed out the little guys (the purely investment banks and the purely commercial banks). If even the little guys were deemed too big to fail, it clearly was not the result of Glass-Steagall.
Lastly: Consider the sheer volume of today's regulations. Per Zingales: "In 2010 we saw the passage The Dodd-Frank financial-reform bill, which was a staggering 2,319 pages long. Things were not always this way. The Glass-Steagall Act, which in 1933 separated investment banking from commercial banking, was just thirty-seven pages long. The act that created the Federal Reserve in 1913 ran to thirty-one pages. Even the recent Sarbanes-Oxley Act, which was written in response to the Enron and Worldcom scandals, was only sixty-six pages long. Tellingly, the Dodd-Frank bill was popularly called the "Lawyers' and Consultants' Full Employment Act of 2010." It may well have created more jobs than Obama's original 2009 stimulus package did.
Each page of regulation probably provides a year's worth of employment for several lobbyists and a couple lawyers and economists. This gigantic waste is never properly factored into our economic analysis. But the biggest cost is the smokescreen that overregulation creates. For centuries, in Continental Europe, laws were written in Latin, a language that ordinary citizens could not understand. As institutions were democratized, laws started being written in the vernacular. Overabundant regulation and the legalese that it is written in, achieves the same goal as Latin once did: to confuse the public."When I was writing regulations," says one retired EPA regulator, "I was told on more than one occasion to make sure I put in enough loopholes. The purpose of the complexity is to hide the loopholes.""
Again, the bigger the government, the more complex the regulations, the bigger the confusion, the bigger the cronyism. Clearly we have to turn our attention to the source, the adulterer—the politician.
Monday, July 2, 2012
You gotta, therefore, love markets!!
This morning's Wall Street Journal articlePrices of Raw Goods Plunge on Slowdown tells why markets are so critical. I.e., the economy contracts (or growth slows), incomes therefore begin to contract, demand therefore begins to wane, stockpiles (ramped up when prices were higher) are therefore too high, prices are therefore bid lower, and production therefore gets cut (planting the seeds for the next rebound). I.e., free markets, where prices and production reflect the demands of individuals, keep people fed, clothed and in business.
And you thought we needed the government to do all that.
And you thought we needed the government to do all that.
Sunday, July 1, 2012
Fishing for a Net - Or - What you should be thinking about...
Last week's summit delivered a surprise. Germany's Angela Merkel conceded (to Spain and Italy) to allowing any country that meets the EU budgetary requirements to receive aid without additional austerity measures and without the strict oversight of the troika.
They intend to establish a single banking supervisor, you could call it a centralized banking authority - although there was no mention of a deposit insurance program or plan for handling failed banks (I suspect these will be some of the details to come). They plan to end the negative feedback loop between governments and banks (Spain's banks own a ton of Spain's debt) by allowing the European Stability Mechanism (ESM) to provide aid directly to the banks. The big tough-to-swallow concern for individual countries, with regard to the central banking authority, will be the inherent loss of sovereignty.
They also approved a 120 billion euro growth pact (stimulus plan) that would increase the lending capacity of the European Investment Bank (EIB), subsidize small businesses and issue project bonds (for energy, transportation and broadband). Critics cite the plan's relative small size (amounts to 1% of Euro Zone GDP).
Their immediate aim was to inspire confidence in Spain and Italy's creditors (allay default concerns and, consequently, bring down borrowing costs) and thus calm the financial markets. And that they did, if only for a day.
Of course the questions would be;
1. Is this the plan that finally puts a floor under the Euro Zone?
Or, indeed;
2. Can there be a floor without a Euro Bond?
My guesses would be;
1. Nope. But it is a step in the direction the world, ex-Germany, would have them head (notice I didn't say 'a step in the 'right' direction'). Could be a short to medium-term can-kicker.
2. Of course. There's always a floor. And they'd find it so much faster if they'd allow failed banks, and failed nations, to, well, fail - and markets to work. But if we're talking a policy-action-induced floor, I'd call that a net, you wouldn't think so. Merkel would (she implied) sign her own epitaph before signing onto a Euro Bond. Reality: if a Euro Bond is the ultimate can-kicker and she can pull it off and somehow delay the reading of her political career's eulogy, she'll do it. But it'll come under a different label.
As for you, the investor. What should you be thinking about? My sage (28 years as an advisor) advice would be to think about what you're going to barbecue for the kids on 4th of July. But knowing you'll be thinking about your portfolio too, here's something to chew on:
Assuming you're our client; here are a few of the (randomly selected) holdings in the mutual funds, and exchange traded funds (ETFs), that occupy the large cap US equity portion of your portfolio.
Altria
Amazon
Apple
Bank of America
Berkshire Hathaway
Biogen Idec
Caterpillar
Chesapeake Energy
Cisco
Coca Cola
Colgate Palmolive
Costco
Disney
Exxon Mobile
Google
IBM
Intel
JP Morgan
Johnson and Johnson
Kraft
McDonalds
Merck
Microsoft
News Corp
Noble Energy
Oracle
Pepsi
Pfizer
Procter and Gamble
Starbucks
Sysco
Wells Fargo
Now ask yourself, when we're past the sure-to-be-weak Q2 economic numbers, Europe, the US election, the fiscal cliff, etc. - and on to bigger and better things - and a whole new set of worries - will these companies, with their scrubbed balance sheets and strong margins, be cranking out their products and services?
Remember, 85% of the world's people live in emerging markets. And make no mistake, that emerging 85% is thirsting for the infrastructure and lifestyles developed markets enjoy. I.e., there's a (long-term) world of opportunity for smart well-positioned companies.
In terms of your particular portfolio's allocation: If you're in or nearing retirement you'll have modest (defined by your temperament) equity exposure; with a bias toward companies like Kraft, Procter and Gamble, and Sysco. If you're further out (younger) and are more concerned with next Wednesday's tri tip than you are next Tuesday's Italian bond auction, you'll be heavily allocated to stocks; with a bias toward companies like Apple, Chesapeake Energy, and Cisco.
They intend to establish a single banking supervisor, you could call it a centralized banking authority - although there was no mention of a deposit insurance program or plan for handling failed banks (I suspect these will be some of the details to come). They plan to end the negative feedback loop between governments and banks (Spain's banks own a ton of Spain's debt) by allowing the European Stability Mechanism (ESM) to provide aid directly to the banks. The big tough-to-swallow concern for individual countries, with regard to the central banking authority, will be the inherent loss of sovereignty.
They also approved a 120 billion euro growth pact (stimulus plan) that would increase the lending capacity of the European Investment Bank (EIB), subsidize small businesses and issue project bonds (for energy, transportation and broadband). Critics cite the plan's relative small size (amounts to 1% of Euro Zone GDP).
Their immediate aim was to inspire confidence in Spain and Italy's creditors (allay default concerns and, consequently, bring down borrowing costs) and thus calm the financial markets. And that they did, if only for a day.
Of course the questions would be;
1. Is this the plan that finally puts a floor under the Euro Zone?
Or, indeed;
2. Can there be a floor without a Euro Bond?
My guesses would be;
1. Nope. But it is a step in the direction the world, ex-Germany, would have them head (notice I didn't say 'a step in the 'right' direction'). Could be a short to medium-term can-kicker.
2. Of course. There's always a floor. And they'd find it so much faster if they'd allow failed banks, and failed nations, to, well, fail - and markets to work. But if we're talking a policy-action-induced floor, I'd call that a net, you wouldn't think so. Merkel would (she implied) sign her own epitaph before signing onto a Euro Bond. Reality: if a Euro Bond is the ultimate can-kicker and she can pull it off and somehow delay the reading of her political career's eulogy, she'll do it. But it'll come under a different label.
As for you, the investor. What should you be thinking about? My sage (28 years as an advisor) advice would be to think about what you're going to barbecue for the kids on 4th of July. But knowing you'll be thinking about your portfolio too, here's something to chew on:
Assuming you're our client; here are a few of the (randomly selected) holdings in the mutual funds, and exchange traded funds (ETFs), that occupy the large cap US equity portion of your portfolio.
Altria
Amazon
Apple
Bank of America
Berkshire Hathaway
Biogen Idec
Caterpillar
Chesapeake Energy
Cisco
Coca Cola
Colgate Palmolive
Costco
Disney
Exxon Mobile
IBM
Intel
JP Morgan
Johnson and Johnson
Kraft
McDonalds
Merck
Microsoft
News Corp
Noble Energy
Oracle
Pepsi
Pfizer
Procter and Gamble
Starbucks
Sysco
Wells Fargo
Now ask yourself, when we're past the sure-to-be-weak Q2 economic numbers, Europe, the US election, the fiscal cliff, etc. - and on to bigger and better things - and a whole new set of worries - will these companies, with their scrubbed balance sheets and strong margins, be cranking out their products and services?
Remember, 85% of the world's people live in emerging markets. And make no mistake, that emerging 85% is thirsting for the infrastructure and lifestyles developed markets enjoy. I.e., there's a (long-term) world of opportunity for smart well-positioned companies.
In terms of your particular portfolio's allocation: If you're in or nearing retirement you'll have modest (defined by your temperament) equity exposure; with a bias toward companies like Kraft, Procter and Gamble, and Sysco. If you're further out (younger) and are more concerned with next Wednesday's tri tip than you are next Tuesday's Italian bond auction, you'll be heavily allocated to stocks; with a bias toward companies like Apple, Chesapeake Energy, and Cisco.
Letter to the New York Times (regarding Apple's "underpaid" Army)
Letter to the New York Times:
In your June 23, 2012 article Apple's Retail Army, Long on Loyalty but Short on Pay, your journalist implies that your inquiry, four months ago, into Apple's compensation arrangement with retail employees has inspired an acceleration in pay increases. On behalf of the employees of the next unusually profitable enterprise you would attempt to aid, and the whole of society, I ask that you refrain. While your intentions I suspect would be noble, I'd like you to think a little deeper and consider the harm in your actions.
Apple has provided a wonderful opportunity for entry level Americans to learn from one of history's truly great organizations. By coercing a higher wage than market forces demand, you compel one, if not all, of the following outcomes (as Apple necessarily institutes margin-maintaining measures):Fewer new employment opportunities (you are aware of our current unemployment rate?), fewer skilled workers to step to rung two (then three, four and so on) of the economic ladder (you are aware of our nation's lack of skilled labor?), reduced employee benefits (Apple employees currently enjoy 401(k) matching, medical insurance, discounted pricing on Apple products and discounted pricing on Apple stock), higher iPhone, iPad, etc. prices to customers, lower dividends and capital gains to shareholders, and aslower pace of innovation.
Sincerely,
Marty Mazorra
In your June 23, 2012 article Apple's Retail Army, Long on Loyalty but Short on Pay, your journalist implies that your inquiry, four months ago, into Apple's compensation arrangement with retail employees has inspired an acceleration in pay increases. On behalf of the employees of the next unusually profitable enterprise you would attempt to aid, and the whole of society, I ask that you refrain. While your intentions I suspect would be noble, I'd like you to think a little deeper and consider the harm in your actions.
Apple has provided a wonderful opportunity for entry level Americans to learn from one of history's truly great organizations. By coercing a higher wage than market forces demand, you compel one, if not all, of the following outcomes (as Apple necessarily institutes margin-maintaining measures):Fewer new employment opportunities (you are aware of our current unemployment rate?), fewer skilled workers to step to rung two (then three, four and so on) of the economic ladder (you are aware of our nation's lack of skilled labor?), reduced employee benefits (Apple employees currently enjoy 401(k) matching, medical insurance, discounted pricing on Apple products and discounted pricing on Apple stock), higher iPhone, iPad, etc. prices to customers, lower dividends and capital gains to shareholders, and aslower pace of innovation.
Sincerely,
Marty Mazorra
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