Living Rich & Loving It

The book I wrote, "Living Rich & Loving It" which is available on Amazon Kindle strives to develop a vision that being rich is not only about achieving financial independence.  It’s about living a happy, healthy, simple, balanced and fulfilling life with minimal stress.  This is a cradle to grave guide to life book.  If you have goals, dreams and aspirations in life, you have a sense of direction but you still need a road map to take you from here to there. I hope this book will serve as that road map for you.

Learn how to:

  • Find a job you love. If you cannot wait to get up and get to work every morning, then you’ve found the job you love.  Otherwise, you need to read the chapter, “Find a Job You Love” and the chapter, “Increase Your Income with these Ideas”.
  • Create a budget so that you will always have a surplus at the end of each month.
  • Maximize contributions to your retirement account and accumulate more than a million dollars for retirement.
  • Determine if converting to a Roth IRA or Roth 401k is right for you. Ed Slott, the IRA guru says converting your IRA to a Roth IRA is tantamount to moving your account from “accounts that are forever taxed to accounts that are never taxed”. WRONG!  See Chapter, “Your Retirement Plan”.
  • Never lose money in the stock market by using “The KISS Principle” and “Auto-Pilot Strategy”.
  • Predict the next recession by watching the “yield curve”. It is so simple yet so effective.
  • Calculate the amount of life insurance you need. Insurance brokers will hate this chapter. The answer will surprise you.
  • Avoid Veblen Goods – the savings will amaze you.
  • Shop around for everything. If you are struggling to make ends meet, this chapter will show you why.  Learn how to save more and spend less.
  • Purchase your primary residence – Pros and cons of owning vs. renting. The analysis chart shows the clear winner which will surprise you.
  • Distinguish good debt from bad debt---when borrowing makes sense. Analysis table proves that some debts are good.
  • Never take unnecessary risks. Don’t do anything stupid. This chapter shows that stupidity is the great equalizer in life.  Doing any of the things on the list may change your life or worse may end your life in the blink of an eye.
  • Stay away from rental properties. This chapter tells you why it is not worth being an absentee landlord.
  • Handle emergencies without an emergency fund. The analysis chart shows why you should not have an emergency fund. The figures will astound you. This chapter also shows the reader where to get cash for emergencies once you get rid of your emergency fund.
  • Never ever listen to Suze Orman that 401k loans are taxed twice. 401k loans are not taxed twice. This chapter proves it.
  • Plan for college. How will you pay for your children’s college education? Read the many different ideas in this chapter on how to increase your children’s chances of getting offers from good colleges and universities.  See the 9 simple steps you can take in chapter, “Planning for College”.
  • Increase your income. Make more money in your spare time with these ideas. When you read the money-making ideas in this chapter, you will scratch your head and say, “why didn’t I think of that?”
  • Create a document storage and retrieval system. So simple yet so effective. It will free up a lot of your limited living space.
  • Implement a stress-free personal time management system. This system will organize your day and free up plenty of your time for use at your leisure.
  • Store and safeguard passwords – Simple trick will help you create and remember strong passwords.
  • Maximize your Social Security benefits – In light of the elimination of “File and Suspend” and “Restricted Application” strategies, the chart shows claiming strategies for 1) Single never married, 2) currently married, 3) married at least 10 years, divorced at least 2 years, currently single, 4) divorced, has remarried and currently married, 5) widow/widower, 6) surviving divorced spouse, married at least 10 years, currently single or remarried after the age of 60.
  • Find the best places for retirement – Some of these retirement communities are surprising. Some viable locations have ½ the cost of living of most U.S. cities.
  • Pay for nursing home and long-term care. The cost of nursing home and long term care can wipe out your entire estate.  Read this chapter for solutions.
  • Qualify for Medicaid benefits for LTC. You do not have to spend down your savings.  This chapter explains many different ways other retirees have been dealing with the “spend down” dilemma.
  • Establish estate planning. How to protect your estate from estate tax and inheritance tax.
  • Enrich Your Life by Exploring the World – Travel as soon as you can while you are still young. This chapter discusses why the money you spend traveling and exploring the world is money well spent.
  • Stay Healthy and Fit as You Age – There are a few minor behavior modification changes that you can put into practice that will keep you healthy throughout your retirement years.

Ready to live a Rich, Happy, Healthy, Simple and Balanced Life?

Buy this book here!

Stock Market Investors, Fasten your Seatbelts

As of this writing, all of the major market averages have been declining significantly.  The Dow Jones Industrial Averages (DOW) is down 400 points, NASDAQ, 90 points and the S&P 500, 45 points. If you read the headlines right after Federal Reserve Board Chairman Ben Bernanke testified before the Senate Banking Committee today, July 21, 2010, you would think the world is coming to an end.  AP prints, “STOCKS FALL SHARPLY...” while Reuters states, “OUTLOOK UNUSUALLY UNCERTAIN….”  The fact is that a sluggish economy will benefit smart investors.  Smart investors do not act solely on emotion and fear because they are savvy enough to know that harbingers of gloom and doom who write about the stock market, the economy and investments know just as much as Mr. Adam Monk, the stock-picking monkey who reportedly made a lot of money for those who followed his picks. Gloom and doomers quickly reverse themselves the moment the wind changes direction.  It is like following the herd which is not hard to do.

The fact is that a sluggish economy will keep inflation and interest rates low making it easier for consumers to purchase.  Prices of goods especially large ticket items such as automobiles, home appliances, furniture and computers will be kept in check.  The price of real estate had been rolled back to a decade ago in many areas of the country.  This, coupled with low mortgage rates should encourage first time homebuyers and real estate investors alike to snap up bargains. A sluggish recovery will put more pressure on this administration to rethink its goal of increasing taxes.  A sluggish recovery would prove to this administration that taxing the rich and increasing entitlements is not the way to economic recovery and prosperity.  A sluggish recovery means the consumer is not spending as much, as expected in a typical expansion.  Hence, the consumer has more money to pay down his debt and to increase his savings.  He is poised to spend.  He may go out on a spending spree at the onset of any type of good news because in our culture, in a free market society, the consumer has an inherent need to keep up with the Joneses.  Another important factor is that many businesses are reporting record profits but are reluctant to invest and hire due to uncertainty about taxes, Europe’s debt crisis and more government regulations.  When the uncertainty goes away, the recovery may catch fire quickly and may even overheat.  The European bank stress test results to be disclosed this Friday, July 22 may add to more uncertainty which may cause investors to dump stocks. But the savvy investor can look beyond the horizon.

Geithner and Bernanke know what is going on with the economy and they have the power to change things. Bernanke told lawmakers today, "If the recovery seems to be faltering, we have to at least review our options, but no further action is planned for now because the economy is still growing”.  Geithner has the power to counsel President Obama with regard to taxes and he must have told Obama that the private sector does not like tax increases.  I predict that this administration will take appropriate action if signs point to another recession which President Obama will have to own.  He will not let this fragile recovery slide back into a recession because that would most likely seal his fate as a one-term president.  To me, fixing this economy is as simple as following what JFK, Reagan and Clinton did, and that was to reduce corporate and capital gains taxes.  Obama may be compelled to follow the same route if the economy appears to be sliding back into a recession and once again, that would be good for investors.

If this recovery continues to be sluggish but does not fall back into a recession, stock prices will continue to rise even though they may turn sideways some days and drop halfway to the floor other days.  Yes stocks will rise and fall but they will not sink to recession level prices unless there is another recession.  Economics 101 and plain common sense.

This article is not intended to provide financial advice.  Please consult your financial advisor before acting on any advice provided herein.

Any opinions and views expressed herein are the sole responsibility of the writer.

QE2 = Printing Money

Just as gay no longer means happy, QE2 no longer means Queen Elizabeth II.  Lately, the business world has been using the term QE2 a lot.  QE2 is short for the second round of the United States Federal Reserve’s (“Fed”) Quantitative Easing (“QE”).  This second round of QE is estimated to total $600 billion.  The first QE which was spaced out over one year, between 2008 and 2009 totaled almost $2 trillion.

Bloomberg News reports that the average person does not understand the function of the Federal Reserve.  Therefore, it is easy to conclude that QE is even less understood by the average person.  It is my goal to unravel the mystery of QE in this article.  To simplify, QE is another term for “printing money”.  The Fed, which is the Central Bank of the United States, regulates the amount of money in the economy by selling and buying bonds and by increasing and decreasing interest rates to member banks. The Fed has several ways of printing money.  It can issue Treasuries, i.e. notes, bills and bonds and it can also just credit itself as in this case of Quantitative Easing.  The Fed simply credited its balance sheet for the amount it needs to buy bonds from banks and other financial institutions.  The assets the Fed will buy with the money it credited itself are not limited to government bonds but are expanded to include mortgage backed securities and corporate bonds.  The Fed’s objective is to stimulate the economy by encouraging lending.  Reducing interest rates to almost nil has not worked to stimulate lending so this is the last resort for the Fed.  When the Fed buys idle assets such as treasury and corporate bonds, the banks and financial institutions such as Goldman Sachs receive liquid assets on their balance sheets in exchange for idle assets thus increasing the amount of cash at their disposal.  The Fed is hoping that the banks would ease up on lending and lend this new found cash to businesses and individuals. The assumption is that businesses that can borrow would use the money to increase capital investments, expand operations and hire more workers. For the banks to profit on QE, the newly found cash will have to be invested somewhere, i.e. by lending it to credit worthy borrowers or by putting the money in other investments such as into the stock market.  This is the main reason of the sudden surge in equity prices at Bernanke’s announcement of QE2. The Dow Jones Industrial Averages (DJIA) increased by 11% since August in anticipation of the announcement which happened in early November.

QE2, a.k.a. “printing money”, a.k.a. “expansion of the money supply” will reduce the value of the dollar.  This is basic Economics; The Law of Supply and Demand.  The dollar has been losing value against major currencies since the announcement of QE2.  Increasing the money supply will also increase inflation.  The word “inflation” is just as mysterious to most people as any economics term although it is one of the most overused words today.  To simplify what it means, imagine you are 1 of the 5 remaining finalists on the CBS show SURVIVOR.  You have not eaten any solid food in 5 days.  Jeff Probst, the host brings out a slice of pizza and gives each person $100.  He asks the players to bid an amount for the slice of pizza and the highest bidder wins.  Since there is only one slice, it is safe to say that each player would scramble to bid $100 for that single slice even though that slice normally costs only $2 in any fast food court, because once that slice of pizza is gone, it’s gone.  What if there are 6 or 7 slices?  What if there are 20 slices?  Then the bidders will not have to bid so much because there are more than enough slices to go around. Everyone can get a slice even with a low ball offer.  Let us get back to the single slice example but add quantitative easing to the scenario.  5 players have $100 each to buy up a single slice of pizza but you just happen to have a checkbook in your back pocket.  Every player bids $100 but you hand over $100 cash and a $100 check.  You get the slice of pizza.  That my friends is how QE works.  With your checkbook in hand, you are the Fed.

The Fed is hoping to stimulate the sluggish economy with its QE2 move but many economists think that the move may only spur inflation, not the growth needed to reduce the high rate of unemployment.  Officials of other countries including China, Brazil and the EU were quick to criticize Bernanke’s move arguing that QE2 only serves to promote currency wars.  After all, Japan’s decade long QE did not work, why should it work here? A cheap dollar is not good for foreign exporters of goods into the United States because their products become more expensive for Americans which causes higher inflation.  I am of the opinion that QE2 is not a good idea.  QE1 was necessary to restore stability to the banking system but I find this second round of QE as an arrogant and a largely political move.  Arrogant because Fed’s Chairman Bernanke knows that the dollar is the global reserve currency so the printing of money can be done without bankrupting the dollar.  Political because President Obama’s popularity will keep plunging unless the 9.6% unemployment rate is reduced.  The Fed’s QE2 move seems to be calculated to substantially reduce unemployment before the next presidential campaign goes into full swing.

Finally for investors, be cautious.  If you are invested in the stock market, watch the market carefully.  This newly printed money will be looking for a home.  Some of it will inevitably find its way into the stock market driving equity prices up.  The “feel good  effect” of seeing your investment or retirement account go up in value may indeed spur an increase in your consumption pattern contributing to the growth in GDP but this “feel good effect” is not a long term condition.  This intervention in an economy that is slowly but surely on the way to recovery is unjustified.  It may lead to the next bubble burst.

This article is not intended to provide financial advice.  Please consult your financial advisor before acting on any advice provided herein.

Any opinions and views expressed herein are the sole responsibility of the writer.

10% Unemployment not enough to derail recovery

When I wrote my article entitled “SLUGGISH RECOVERY, GOOD FOR INVESTORS” in July before I went on my summer vacation, many “gloom and doomers” thought I was crazy.  In fact I was bold enough to predict an 11,300 Dow for the end of September.  That was on July 21 when the DJIA closed at 10,120. We are not quite at 11,300 yet but the DOW closed up at 10,860 last Friday, September 24, 2010.

The direction of the market is really not hard to predict.  Now that the NBER has ruled out a double dip recession, stock prices will keep going up unless there is a new recession.  Yes there will be days when stocks will go up, down and sideways but investors will continue to be bullish if the economy is still expanding.  1% to 2% GDP growth is good enough to continue an upward trend in stock prices.  This statement is easily proven.  In the beginning of the year, many economists predicted the economy to grow 4% to 5% this year.  The projection had been revised downward several times and stocks tumbled each time the lower projection was announced.   The knee jerk reaction of investors is to dump equities in favor of bonds and tangible assets upon hearing a lower growth rate.  Then investors become accustomed to the sluggish growth, after which they start buying stocks again.  The bullish trend will not stop unless there is another recession.  Even if there is negative growth in one month, 2 months or even in an entire quarter if the economy recovers again in subsequent months to show growth in GDP, the market will come back.  There will be fluctuations and corrections in the market but the sophisticated investor will remain invested in equities unless signs point to another recession.  At the risk of repeating myself, commodity prices are up, corporate profits are up, many publicly held corporations including numerous financial institutions have resumed paying dividends because of their huge profits, many publicly traded stocks of companies in a wide assortment of industries have hit a 52-week high.  These are not signs that there is another recession just around the corner.  Another proof is that inflation is back.  It means that the deflationary period is gone and the economy is starting to heat up again.  Foreclosures are up and housing starts are down, but this is a normal cycle after homeowners enjoyed double digit increases in home prices for many years.

The not so rosy sector of the economy is the high unemployment rate.  1% to 2% GDP growth will only make a small dent in the unemployment.  We need 8% GDP growth like in the Reagan expansion years to reduce unemployment to 5%.  Many economists are of the opinion that the reason for the high unemployment rate is the reluctance of small businesses to invest and expand because of the uncertainty in taxes and new regulations.  I disagree with their opinion.  In a free market economy like ours, the desire to make money is so intense and the chance of success is so high compared to a government controlled economy that most smart entrepreneurs will not postpone their plan for growth and expansion just because of regulations and a few percentage increase in taxes.  However, I agree with Rep. Paul Ryan (R-Wisc) that keeping the Bush Tax Cuts and reducing spending will accelerate business investments.  Paul Ryan who is a ranking member of the Congressional Budget Committee and Ways and Means Committee is a Reagan conservative who is touted as a rising star in the Republican Party and possible nominee for the 2012 presidential election.

Now that the “great recession” is over, it is wise to review what caused it.   The NBER, a historical recorder of past events declares the recession started in December 2007 and ended in June 2009.  The “great recession” was caused by the consumer who stopped spending, caused by worries of the stability of the banking and financial system, caused by massive default of derivatives issued by the financial institutions, caused by the housing bubble burst, caused by massive default of homeowners in payment of their mortgages, caused by increase in mortgage rates and high fuel prices. What could be so simple?

I went to a party last Saturday night.  The state of the economy became the dominant subject of conversation because many of the guests were sophisticated entrepreneurs and economists.  I found that the adage “ask 10 economists a question and you will get 10 different answers” is really true.  Most of them disagreed on the state of the economy and how to “fix” the nation’s economic problems.  However, the wife of the CEO of a popular restaurant chain offered her solution in the form of a question in between sips of mimosa.  She asked “why doesn’t Obama give every American citizen, man, woman, child $100,000 each?  If the population of America is now 350 million, wouldn’t one hundred thousand dollars for each person cost much less than the new stimulus of 50 billion dollars the Obama administration had been dangling about? “It suddenly became quite, although some of the party goers dismissed “her solution” with some condescending remarks.  I quickly excused myself, went to the men’s room, locked myself inside a stall and pulled my new iPhone which has a calculator. Lo and behold, $100,000 x 350 million is indeed $35 billion…less than the $50 billion Obama stimulus package. When I came out of the men’s room I was surprised that most of the guests continued to discuss and debate her solution.  A CFO of an oil refining company said her idea is great because those who deserve the money will find a way to legally take the money away from those who do not deserve it. To me, the idea of this lady, a trophy wife who is relegated to ribbon cutting ceremonies and home decorating made as much sense as ideas from her husband and the other guests.

This article is not intended to provide financial advice.  Please consult your financial advisor before acting on any advice provided herein. Any opinions and views expressed herein are the sole responsibility of the writer

Sluggish Recovery, Good for Investors

If you read the headlines right after Federal Reserve Board Chairman Ben Bernanke testified before the Senate Banking Committee today, July 21, 2010, you would think the world is coming to an end.  AP prints, “STOCKS FALL SHARPLY….” while Reuters states, “OUTLOOK UNUSUALLY UNCERTAIN….”  The fact is that a sluggish economy will benefit smart investors.  Smart investors do not act solely on emotion and fear because they are savvy enough to know that harbingers of gloom and doom who write about the stock market, the economy and investments know just as much as Mr. Adam Monk, the stock-picking monkey who reportedly made a lot of money for those who followed his picks.  Harbingers of gloom and doom quickly reverse themselves the moment the wind changes direction.  It is like following the herd which is not hard to do.

The fact is that a sluggish economy will keep inflation and interest rates down making it easier for consumers to purchase.  Prices of goods especially large ticket items such as automobiles, home appliances, furniture and computers will be kept in check.  The price of real estate had been rolled back to a decade ago in many areas of the country.  This, coupled with low mortgage rates should encourage first time homebuyers and real estate investors alike to snap up bargains. A sluggish recovery will put more pressure on this administration to rethink its goal of increasing taxes.  A sluggish recovery would prove to this administration that taxing the rich and increasing entitlements is not the way to economic recovery and prosperity.  A sluggish recovery means the consumer is not spending as much as expected in a typical expansion.  Hence, the consumer has more money to pay down his debt and to increase his savings.  He is poised to spend.  He may go out on a spending spree at the onset of any type of good news because in our culture, in a free market society, the consumer has an intrinsic need to keep up with the Joneses.  Another important factor is that many businesses are reporting record profits but are reluctant to invest and hire due to uncertainty about taxes, Europe’s debt crisis and more government regulations.  When the uncertainty goes away, the recovery may catch fire quickly and may even overheat.  The European bank stress test results to be disclosed this Friday, July 23 may add to more uncertainty which may cause investors to dump stocks. But the savvy investor can look beyond the horizon.

Geithner and Bernanke know what is going on with the economy and they have the power to change things.  Bernanke told lawmakers today, "If the recovery seems to be faltering, we have to at least review our options but no further action is planned for now because the economy is still growing”.  Geithner has the power to counsel President Obama with regard to taxes and he must have told Obama that the private sector does not like tax increases.  I predict that this administration will take appropriate action if signs point to another recession which President Obama will have to own.  He will not let this fragile recovery slide back into a recession because that would most likely seal his fate as a one-term president.  To me, fixing this economy is as simple as following what JFK, Reagan and Clinton did, and that was to reduce corporate and capital gains taxes.  Obama may be compelled to follow the same route if the economy appears to be sliding back into a recession and once again, that would be good for investors.

If this recovery continues to be sluggish but does not fall back into a recession, stock prices will continue to rise even though they may turn sideways some days and drop halfway to the floor other days.  Yes stocks will rise and fall but they will not sink to recession level prices unless there is another recession.  Economics 101 and plain common sense.

This article is not intended to provide financial advice.  Please consult your financial advisor before acting on any advice provided herein.

Any opinions and views expressed herein are the sole responsibility of the writer.

What causes stock market fluctuations?

Ken Little who authored 12 books on investing and personal finance gives the following reasons for the drop in stock prices:  Interest rates, inflation, earnings, oil and energy prices, war and terrorism, crime and fraud and serious domestic political unrest.  With all due respect to Mr. Little, what he pointed out are the symptoms of the disease rather than the disease itself.  The disease which causes the stock market to tumble significantly is recession.  Yes the stock market will fall at the onset of various bad news such as an increase in the interest rates and energy prices, instability of the Euro Banking system and the high jobless rate.  But if these factors do not lead to a recession, the stock market should quickly recover and continue to rise. Sudden market fluctuation is significant for short-term traders but should not be for long term investors because the market always recovers after a recession.  It would be nice if you can predict the highs and lows of the market because you could have made a killing if you had sold in October 2007 when the Dow Jones Industrial Average hit 14,000 and bought again in March 2009 when it plunged to a low of 6,600.  Therefore, the Eurozone problem, high jobless rate, the downgrading of Spanish bonds, North and South Korean conflict, Israeli’s deadly raid and the BP oil spill do not worry me as much as decrease in retail sales, reduction in hiring, declining commodity prices, industrial production and housing starts.  The day-traders may drive down the stock market purely on investor sentiment and emotion, and we may yet see a DJIA of 9,000 in just a few weeks, but it defies logic for a downward trend to continue if all leading economic indicators are pointing upwards.  This is all intricately connected because if stocks do not recover quickly, and we get into a prolonged bear market, consumer confidence may deteriorate resulting in reduced consumer spending.   Again, I do not see a protracted bear market unless we are heading for another recession.

We must go back to basics to enable us to assess where we are now in the economic recovery.  Recessions are a normal part of a business cycle.  Recession comes from the word “recess” which most of us know is the suspension of whatever we are doing in order to have fun and relaxation.  As in “let the children play during recess”.  However, in business lingo recession is a word that is feared by most people because it can be defined as the suspension of consumer spending or to put in milder terms, an intermission from spending.  In economic terms recession is often referred to as a “contraction” of the economy and the recovery which follows is commonly called an economic expansion.  Recession is feared by most people because it results in the reduction of wealth.

Historically, recessions are brief with this last one, dubbed “the great recession” being the most severe since the great depression.  It is the consensus of many economists that this last recession lasted 18 months.  Now that we know recessions are merely temporary suspension of consumer spending, we can be sure that economic growth will follow shortly unless a catastrophic event ensues, such as the collapse of the banking system leading to a depression, another bubble burst or some kind of a natural disaster.  It is the opinion of many economists that “the Great Recession” has not been followed by a “Great Recovery” because taxes and government spending have not been reduced by this administration.  Historically, tax cuts have always spurred economic growth.

But where are we now in the course of this economic expansion after the great recession?  I have a more optimistic outlook and I am hoping that we are halfway back up a “V” shape recovery and not in a “U” shape recovery.  The European Debt Crisis and the high unemployment rate alone should not cause the stock market to plunge. First, the European Debt Crisis has been alleviated by the commitment of the European Union Central Bank and the IMF (International Monetary Fund) to pledge almost $1 trillion in bail out money (Le Tarpe) for ailing Eurozone countries such as Greece, Spain and Portugal.  Le Tarpe has a great potential for success if used judiciously in buying junk bonds of troubled countries but The European Central Bank must continue to demand austerity measures from leaders of these countries.  Although Greece’s default is imminent, Le Tarpe should temper investors’ sentiment since the bail out money should tide Greece over for a year or two.  The stock market plunge this month, the worst May for stocks since 1940 was caused by investors’ panic and uncertainty about Le Tarpe.

Second, the high jobless rate of 10% is not enough to derail the recovery.  Even if the entire unemployed population stops spending, there is still the remaining 90% of the working population, which according to statistics, continues to consume.  If consumer spending is lower than forecast in May, that would worry me and I am sure it would worry stock market investors.  Despite the high jobless rate the private sector is still reporting robust increase in hiring through the end of April.  What would cause the stock market to plunge some more is bad economic news that could signal another recession.  And going back to basics again—what will erode consumer confidence and stop the consumer from spending?  For starters:  Reduction of income; job insecurity; debt increase due to higher interest rates; inflation; diminution of assets, of investments and other tangible property such as real estate.

This article is not intended to provide financial advice.  Please consult your financial advisor before acting on any advice provided herein.

Any opinions and views expressed herein are the sole responsibility of the writer.

PIIGS: Too Big to Fail

The largest economy in the world, The United States of Europe, officially called the European Union is facing a financial crisis that could weigh down our own economic recovery.  The bears on Wall Street have outnumbered the bulls, focusing on the economic upheaval in Europe instead of the good economic news here at home.  Economic indicators here in the U.S. are still pointing upwards indicating the continuation of our recovery from the great recession.  Housing starts rose an estimated 5.8% in April to an annual rate of 672,000; retail sales were up 0.4% beating expectations; industrial production moved higher; 1st quarter earnings of 75% of companies in the S&P 500 have exceeded expectation and most notably, the private sector added 32,000 jobs according to ADP.  Various economists differ in their projection of job growth this year, from a low of 300,000 to a high of 1 million private sector jobs.  I believe that the extension of unemployment and health benefits is a disincentive for many unemployed workers to seek work, thereby contributing to the high unemployment rate which has been hovering around 10%.

The malaise in Europe is hard to ignore because our global economies are all inter-connected.  The failure of any of the EU’s most ailing economies, the PIIGS which is an acronym for Portugal, Ireland, Italy, Greece and Spain could send a tsunami of global economic woe: a financial meltdown much worse than the sub-prime mortgage crisis of 2008.  The PIIGS are less affluent countries than their northern neighbors such as Germany and France and there is such a disparity of wealth between member nations.  The IMF/European Debt Bailout of 750 billion Euros, which has been nicknamed “Le TARP”, pacified the market early last week so the bulls started running again driving up the Dow Jones Industrial Averages (DJIA) 500 points from the previous week’s low of 10,380.  As reality sank in, investors became jittery and gravitated towards tangible investments such as gold, driving up its price to $1220 an ounce.

Reality is that Greece will eventually default.  It is my educated opinion based on facts.  Greece is the second most corrupt developed country in the world according to Forbes Magazine.  It is easy to bribe Government officials.  It is a social democracy, a welfare state with generous entitlement programs which includes early retirement, state pensions, and huge bonuses for public employees and a generous cradle to grave health care system.   The wealthiest members of society, shipping magnates like Onassis, lawyers, doctors and other highly paid professionals have traditionally avoided paying direct taxes.  I do not think the Greek populace can swallow the austerity measures being currently debated by the Greek parliament.  Public anger in Greece will continue running at explosive levels. Why should the Greeks agree to do away with their entitlements which have been their way of life for such a long time?  Besides, most Greeks do not blame themselves nor their government for their predicament.  Rather, many Greeks would argue that the U.S. caused the financial meltdown leading to the severe world wide recession and banking crisis. Greece’s accumulated deficit is running 113% of GDP.  They have ran out of money to pay for their bonds that are coming due.  The solution is to issue more long term bonds to raise money but their government bonds have been downgraded making it impossible to sell them to continue to finance deficit spending.

Austerity measures being proposed include the freezing of government pay till 2014; dispensing with the 2-month bonus for public employees; increasing of the retirement age from 61 to 63; increasing VAT (Value Added Tax) from 19 to 23%.  It is reported that 1/3 of the Le TARP money or 250 Euros will come from the International Monetary Fund (IMF) out of which 10 billion Euros is the contribution of the U.S.

Volcker’s statement last week that the Euro may break up, points to the core of the problem of the European Union. The Euro has gone down from its high of $1.50 per Euro last November to a low of $1.24 this week.   The problem is that on one hand, member countries have become financially responsible for each other as magnified by this crisis.  On the other hand, member countries have very little influence on how another country is governed because each member is an indivisibly sovereign state. At least if Greece goes back to its own currency, the drachma, it will suffer on its own for its fiscal irresponsibility.  This current crisis is testing the EU if it can stay united and if the Euro will be preserved.

The 750 billion Euros may not be enough to rescue Greece.  It certainly will not be enough to bail out other PIIGS in case any of them defaults on their external debts.  If one falls, it would be followed by another and another and another.  And this is what worries me and makes me bearish on the market despite the good economic reports in this country.

This article is not intended to provide financial advice.  Please consult your financial advisor before acting on any advice provided herein.

Any opinions and views expressed herein are the sole responsibility of the writer.

BUSH-OBAMA Recession, No Different from the Rest

Many economists, prognosticators, financial pundits, stock brokers and financial planners have committed a big blunder or a big hoax by proclaiming this recession different from the rest and the worst since the great depression.  The fact is I believe this recession is no different from the previous post war recessions.  Those who share my belief have made a lot of money in the stock market during this recession.  In the first quarter of this year, the majority of financial pundits I watched on TV advised investors, some of whom have already lost 50% of their savings at that time,  “to stay out of the market” unless they have 10 or more years to go before retirement.  Who knows how many took their advice and got out of the market, thereby missing the bull market that started in March and is still going strong as of this minute.   In January and February, many financial experts were predicting the Dow Jones Averages to go down to 5,000.  In “DIDOSPIN-11,000 DOW, August 7, 2009” when DJIA was 9,370, I predicted the Dow to climb to 10,000 before the end of the year and to 11,000 before the end of next year.  It already reached 10,000 last week. Most of the financial experts I watched on the Lou Dobbs and Larry Kudlow shows collectively stated that “it may take 10 years to recover losses in retirement plans…”   Shame on them for being so incompetent or for perpetrating a hoax!   Those investors who stayed put have already gained back most of what they have lost and I believe this bull market still has legs before the next significant market correction.

In “DIDOSPIN- Obama’s Recession, March 8, 2009”, I said “Recessions are part of a normal economic cycle.  Soon consumers will come back and resume buying necessities such as refrigerators, TVs, computers, furniture, cars…”  How true!  A lower than expected contraction in GDP at 1% in the 2nd quarter is believed to have been followed by a small positive increase in GDP in the 3rd quarter, although official stats have not yet been released.  I predicted a much bigger increase in GDP the 4th quarter.  The increase in GDP is an indication of an increase in consumer spending.  One thing to remember is that GDP stats do no even take into consideration business to business consumption, only the consumption of the ultimate consumer or end-user.  This is something that many people are not aware of. 

I secretly scoffed at my boss in January when he told me in a panic that we must dig in our heels in this “worst ever recession”.  I told him, “We’ve seen this before, the last one in 2001….” “No, no, no”, he adamantly replied, “this is different”.  How wrong he was!  The only difference between this recession and the previous ones is its nickname.  This one will probably be known by several nicknames such as “Sub prime Mortgage Crisis, aka Housing Bubble Burst, aka Auto Industry Crisis Recession”.  The various nicknames of the 3 previous recessions according to Bloomberg News were:  Dot-Com Bubble Burst – 2000 to 2001; S&L Crisis, 1990 to 1991 and the Energy Crisis Recession, 1981 to 1982.

I concede that this will prove to be the longest recession since the Great Depression.  But its severity and misery index pales in comparison to the Carter-Reagan recession.  According to Bloomberg News, during the 1981-1982 recession, the national unemployment rate was 10.8% at its highest; inflation was 14% and the prime rate went up to 20.5%.  In this current recession, inflation is almost non-existent and the prime rate is the lowest it has been in 50 years (source:  http://www.wsjprimerate.us/wall_street_journal_prime_rate_history.htm).

Obama predicted the unemployment rate will continue to increase and will exceed 10% before the year is over but I will go with my prediction in “DIDOSPIN- Recession Over, June 27, 2009” that it would peak at 9.8%.  This means that more than 90% of the working population is employed and is poised to go back into the “buying mode”. It is a cycle and consumers eventually buy what they need or want. The stock market rally is a big factor in consumer spending.  If a consumer sees his portfolio going up in value, he will have more confidence spending his discretionary income as opposed to saving it for a rainy day.  Fortunately, the behavior of the stock market follows a free market pattern that is predictable.  The stock market does not like government intervention in the free market economy.  It does not like redistribution of wealth; tax increases; government take over of health care, the banking system and other private industries; cap and trade; interest hikes and increase in deficits.  One of the reasons the market is doing so well is that Obamacare and Cap and Trade appear to be in trouble.  There are different versions of Obamacare bills that are still under discussion in the congressional committees, and although Cap and Trade bill passed the house, it is not expected to pass the senate.  If these two bills regain traction, it is almost guaranteed that the market will take a plunge, perhaps causing a double dip recession.

This article is not intended to provide financial advice.  Please consult your financial advisor before acting on any advice provided herein.

Any opinions and views expressed herein are the sole responsibility of the writer.

Recession Over

Despite Obama’s pronouncements of a rough second half of the year, I declare this recession officially over.  I looked at the stock market movement, the Dow Jones and NASDAQ averages, and I conclude that the 50 to 200 day market activity indicates an upcoming bull market.  Oh yes there will be ups and downs and sideway turns in the market but all in all this will prove to be a bull market.  Durable goods orders have been up 3 out of 4 months, corporate capital expenditure is up, and consumer confidence is starting to soar both in housing and in big ticket items.  The Fed’s policy of keeping the prime rate low in spite of an inflated money supply should hold down inflation for at least a year or two.  Relatively low energy prices should also help temper inflation.  Housing affordability is an all time high.  I predict that the third quarter will show a small gain in the GDP followed by a much larger gain in the 4th quarter.

At this point, I like the tech stocks sector, natural resources and developing market sector.  You can invest 10 to 15% of your holdings in real estate securities if you do not mind the volatility and if you can play with this portion of your holdings for the next 2 years.  The real estate sector has been beaten up so badly that it can only go up.

What I do not see improving is the value of our currency.  The U.S. dollar will continue to be tested because of the unprecedented Obama budget deficits and the massive trade deficits particularly with China.  The unemployment rate is a toss up.  I do not have much of a quarrel with Obama’s declaration that it would go up to over 10% before year end, but my prediction is that it would peak at 9.8%.

What does this all mean for the Republican Party?  Bad news.  In this instance, the free market economy will prove to be an ally of Obama because despite Obama’s incessant attack on capitalism, like redistribution of wealth and the take over the health care system, the free market economy will prove to be so resilient in the face of such an assault that it will remain true to its usual pattern of “a long period of feast and a short period of famine”.  Timing is everything and it appears that Obama’s timing is perfect, almost heaven sent.  2010 should be the start of a full economic recovery and 2012 should be a year when the economic recovery gets into full swing.  I am still hoping though that voters will have enough sense to vote Harry Reid, Chris Dodd, Barney Frank and Nancy Pelosi out of their respective offices.

This article is not intended to provide financial advice.  Please consult your financial advisor before acting on any advice provided herein.

Any opinions and views herein are the sole responsibility of the writer.

Scrap Mark to Market Valuation

The key to unfreezing the credit markets is the scrapping of Mark to Market Valuation. Because of the U.S. Generally Accepted Accounting Principles (GAAP) bank assets are valued at Mark to Market.  Many of these assets, Mortgage Backed Securities (MBS) and other derivatives have drastically dropped in value because of this method of valuation.  The Treasury Department and the SEC have branded these types of assets as toxic.  However, the reality is that many of these so-called toxic assets are still earning the same return as when they were first bought by the financial institutions.  Therefore, even if a bank is very profitable it may not pass the Feds’ stress test, and the Feds may opt to re-capitalize it with bail out money thereby subjecting it to compensation and bonus restrictions.  A bank may be considered by the Feds as a troubled institution even if it is drowning in money.

An alternative method of valuation which many economists are now advocating is the Cash Flow Method.  As a simple explanation, the Cash Flow Method of valuation takes into consideration how much income the company receives from the so-called toxic assets rather than how much those toxic assets are presently worth.  If this valuation method is used, financial institutions will start lending again because they will show a stronger balance sheet, presumably taking them off the government hit list of troubled financial institutions.

Geithner’s “plan” which was revealed yesterday is a hybrid of the solution I proposed in DidoSpin 03/08/09.  It appears that the government will indeed create an entity to buy toxic assets (MBS).  The difference is that the government will solicit investors from the private sector to partner with in buying the assets.  With $1.25 trillion to spend, the government, in partnership with private investors hopes to acquire the assets at close to their toxic asset prices.  Obviously the banks will try to get as much money as they can for them.   This is a win-win situation because the banks’ stocks will increase in value as soon as the toxic assets are sold and when the housing market recovers as it always does the government’s holdings will increase in value and the government will make a hefty profit.  If Wall Street is in favor of the “plan” and liberals are against it, then I am for it.

Any opinions and views herein are the sole responsibility of the writer.