Weak January; Charity and Driving Instructions

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Now, on to what I read today…




1. Markets

In like a lion and out like lion poop. The market dropped 53 points on Friday as the much-watched January return was -3.5%.  As mentioned previously, history shows that a down month in January isn’t a good sign for the market.  Of course, January 2009 was terrible and the market had a good year.  The Dow has dropped 6.1% since its recent peak on January 19.




The easy money has been made. Birinyi Associates examined the nine bull markets since 1962 and broke them into quarters (with respect to how long they last).  They calculated the performance in each quarter of each bull market.  On average, the first quarter showed a gain of 37%, then 10%, 12% and 22%.

In addition, they found that when the market drops 5% (during a bull market), the average loss is 9%.  Less than 1/10 of the time does a 5% drop lead to a 20% drop.   Only 25% of the time does a 5% drop lead to a 10% drop.  The average bull market lasts four years.




US stocks comprise 42% of the world’s equity markets. The average US investor has 72% of his assets in the US.  If you are thinking about putting together a diversified global equity portfolio, you can think about the MSCI’s All Country World Index which contains 42% US stocks, 45% developed foreign markets and 13% emerging markets.




Investors loved the emerging markets. Approximately 95% of the $25 billion that US investors put into international funds in 2009 went into BRIC countries (according to Morningstar).




Assets in ETFs have increased 47% to $791 billion in 2009. ETF trading volume averaged 1.9 billion shares per day in 2009, up 20%.  The ten largest ETFs account for almost 40% of ETF assets.  The ten ETFs with the largest dollar trading volume accounted for approximately 60% of the total volume for all ETFs in December.




Permanent “Build America” bonds? Municipalities issued $64 billion of “Build America Bonds” in 2009.  Interest on these bonds is taxed (as opposed to normal municipal bonds) so investors require a higher rate.  But, the government subsidizes the higher rate.  There is talk that the Administration is considering continuing this program past 2010 (when it is supposed to end).




There is less oil being stored at sea. At one point last year, spot prices were significantly lower than futures prices.   Some speculators would buy oil at spot prices, store it and deliver it later.  It’s strange to think that there were 90 million barrels of oil floating around.  The spread between spot and future prices has narrowed and there is less oil now being stored.




2. GDP and Debt

Strong GDP growth. GDP grew in Q4 at an annualized rate of 5.7%.  Approximately 3.4% of growth resulted from businesses reducing inventories at a slower pace than they had in Q3.  When you remove this effect, as well as the stimulus spending, there’s less to be optimistic about.  Unfortunately, this means that employers are also not overly enthusiastic and they’re not hiring yet.

GDP is still 1.9% below its peak level in 2008.  There was a 13.3% annualized increased spending on equipment and software.  Capital spending often means that hiring will follow.




The deficit in perspective. Since WWII, the federal deficit has only grown to 5% of GDP four times: in 1946 and three years under Ronald Reagan.  Today, we’re at 10.7% and we’re headed for several more high years.

A WSJ article quoted different people who, as usual, say that debt is between 50 – 60% of GDP.  As always, they are ignoring the money that the government has borrowed from our Social Security pool.  This is money that taxpayers have contributed and are expecting to be paid.  This is a debt of the government.  And of course, everyone also ignores the unfunded debt.  I’m going to start saying that I’ve only lost a few hairs by combing my hair and ignoring all the hair I’ve lost in other ways.




3. Jobs

Unemployment will last. It’s been estimated that growth would have to equal 5% for the entire year to lower unemployment by 1%.  In other words, we need to create 3 million jobs this year to lower the unemployment rate by 1%.  When the economy was recovering from the 2001 recession, it took two years to move from 6% unemployment down to 5%.  The bottom line is that you have to consider other factors such as growth in the labor force and change in productivity.




Spending on jobs. The President is pushing a $100 billion jobs bill that would give tax credits for employers who hire new workers, increase salaries or expand worker hours.




Jobs created by stimulus. As of September 30, 2009, stimulus recipients claimed that they had saved or created 640K jobs. Some critics argued that some of the money was spent to give raises or to pay employees who were not going to lose their job. As of December 31, the number is down to 599K.




It wasn’t just me who didn’t get a raise! Wage and benefit costs (both before and after inflation) grew at a slower rate in 2009 than in any year since we’ve tracked the number (starting in 1982).  The cost of wages and benefits rose 1.5% while consumer prices increased 2.7%.  For those of you who are economically challenged, this means that you’re worse off.  As a general rule, benefits accounts for 30% of total compensation.




4. Financials

I’m not sure why you would ever want to loan money to a firm owned by an LBO fund (private equity fund). HCA is paying a $1.75 billion dividend to its owners (private equity firms).  This has been a successful LBO.  The owners have made the firm more profitable and they are taking out cash.  In other words, this is like taking out a home equity loan every time your house is worth more.  The lenders remain at risk of a downturn.  That means that the private equity investors do well and the employees and debtholders are taking the risk.  The debtholders have a choice.  The employees don’t.  I know…I know…I’m just a simpleton populist.




Fannie and Freddie are going after banks. Fannie and Freddie have approximately $300 billion in loans to borrowers that are at least 90 days delinquent.  They are now running investigations of the banks that securitized these mortgages or issued these mortgages, looking for underwriting errors and fraud.

Freddie forced lenders to buy back $2.7 billion of loans in the first three quarters of 2009 and it’s estimated that Fannie asked for $4.3 billion back.  Overall, banks repurchased approximately $14.2 billion in loans from holders of MBS during the first nine months of 2009.  This is an increase from $3.6 billion in 2008.  This simply shows an increase in vigilance on the part of Fannie and Freddie.  If anything, it should irritate you that they didn’t go after the banks in 2008.

Currently, 5.29% of loans that Fannie guarantees are at least 90 days behind (up from 2.13% YOY).  They guarantee $2.9 trillion.  At Freddie, 3.87% of loans are delinquent (up from 1.72%).




Bank closings. Five more banks were closed, bringing the total to 14 for the year.  Two banks were in Georgia, one was in Florida, one was in California and one was in Minnesota.




5. Random

I didn’t know that the rich could be populists! There was an article in Saturday’s WSJ describing the world’s elite business executives, politicians and regulators as blaming the bankers for the financial crisis.




Our relationship with China is temporarily deteriorating. The US is selling military weapons to Taiwan.  (China claims that Taiwan is part of China.  It is part of their “One China” policy.)  China says that this is a “gross intervention into China’s internal affairs.”  China has canceled some military exchange programs with the US.  In addition, China is limiting some business activity in China.  As you might expect, I support our sales to Taiwan and our commitment to defend Taiwan from China.  This is part of my “Zero China” policy.

Charity falls (although I have to believe the Haiti tragedy will bring up the aggregate numbers while making things harder on most charities that are not receiving Haiti donations).  The WSJ reported that private donations to charity more than doubled between 1987 and 2007, but then they fell 6% in 2008.  In addition, state and local government funding (which can provide as much as 2/3 of some groups’ funding) has also dropped about 5% in 2009.  Interestingly, they say that charity begins at home and I’m realizing that I received about 5% less charity from Jenny in 2009.  It never really hit me that it was recession related.

The drop in donations occurs at the same time that there is the highest demand for services.  (Another similarity to home.)

There are approximately 1.5 million tax-exempt organizations in the US and they employ approximately 12 million people (almost 10% of our work force).




More polite drivers. Is it just me or is everyone doing this?  In traffic, I find that I’m always letting Toyotas cut in front of me.  I don’t want them behind me with their acceleration problems.  Maybe I’m particularly at risk, because I drive a Pinto.
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