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Jun 29
Love0

“Grexit” Drama

By General

We agree with the views of one of our favorite Economists on the above subject. It is copied below:

Ignore Greece

Don’t let anyone tell you Greece is sticking up for its “dignity” by fighting “austerity.” The current Greek government is sticking up for socialism by fighting reality.

After several years of working toward some very minor market-friendly reforms, and finally starting to see a glimmer of economic growth, Greece elected a far left government back in January. It’s economic and financial situation has gotten worse ever since. Instead of trying to boost growth and pay its debts, by trimming government spending and reducing regulation, the government is saying it won’t cut retirement benefits and wants to raise taxes on what little private sector it has left.

Since Greece no longer has its own currency, it can’t just devalue and cut pension benefits by sleight-of-hand. Instead, politicians have to make tough choices. Greece finally ran out of other peoples’ money. And, since private investors will no longer buy Greek bonds, it has to count on government entities. Fortunately, so far at least, the IMF, the EU, and the ECB have refused to support the status quo.

So what does the new government do? It blames the only groups willing to lend it money and refuses to cut spending. Then, it decides to have a vote, scheduled for July 5th, on the lenders’ latest offer, which would combine higher taxes with pension cuts and some other market reforms. This referendum is all about politicians running scared. They don’t want to make the choice themselves, so they put it to a vote, again.

But Greece has debt payments to make this week, before the vote, on which it’s likely to default. Worse, the government is urging citizens to vote against the lenders’ offer.

Meanwhile, Greek banks have seen massive outflows of deposits. To meet the demand for liquidity, Greek banks have been getting Euros from the Bank of Greece (their central bank), which prints them with permission from the ECB. But now that a debt default is a serious concern, the ECB has withdrawn its permission for the Bank of Greece to print more Euros.

So, the Greek government has declared a “bank holiday” until July 6, during which depositors can only withdraw 60 euros per day. Greece also imposed capital controls to try to keep Euros in the country. This is a travesty, and Greece is headed for a double-dip Depression.

Fortunately, Greece is not Lehman Brothers. It’s like Detroit. When Detroit defaulted, the U.S., and even Michigan, survived just fine. Detroit had already wasted the money it had borrowed, and so has Greece. The only thing left is recognizing the loss. That does not damage the economy; it will be absorbed by the IMF, EU, and ECB.

What Europe wouldn’t be able to absorb is if it caved to the Greek government, if it let them rollover their debts without insisting on reforms that will help Greece eventually repay its obligations. That would bring more Euro leftists into government and lead to even more stagnation and default in the future.

Regardless of how this turns out, it’s getting way more press than it deserves. Any sell-off in US equities is a buying opportunity. Stay the course.

Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Deputy Chief Economist

Jun 18
Love0

Largest University Endowments Afford Their Schools Competitive Advantage

By General

A recent article by CNBC economics reporter John W. Schoen provides an in-depth look into reasons behind the rising cost of higher education in the U.S. It’s a complicated issue, with many moving parts. The after-effects of the 2008 recession, expanding student services, required budgetary expansion in state budgets, such as pensions, healthcare and Medicaid, and other issues have forced schools to increase the student tuition costs.

The improved economy and recovering markets have helped private institutions repair the losses to their endowments caused by the Great Recession.  However, the wealthiest schools with the largest endowments are more successful in fund raising and are receiving an increasingly greater share of donations.The top 40 richest schools received nearly 60 percent of all gift revenue last year, according to Moody’s. Comparatively, most schools have far less money to help subsidize the cost of higher education. The median endowment size for the largest 50 schools is $3.5 billion, while the median college endowment for the entire endowment universe was just $113 million.

That leaves schools with smaller endowments at a disadvantage competing for the best and brightest applicants. For example, at wealthier schools, the share of tuition paid by students is about 15 percent, while the average share of tuition paid for at all private colleges is 75%.

The entire article can be read at: http://www.cnbc.com/id/102746071

Mar 12
Love0

IRS Releases List of Possible Tax Scams to Watch Out for in 2015

By General

Recently we have had several conversations with clients telling us about receiving strange telephone calls from the IRS telling them they owed taxes and needed to send money ASAP.  They called to ask our opinion. Basically these calls are all scams!  The IRS only corresponds in writing with taxpayers and does so using the US Postal Service not FedEx or etc.  Here is a three minute video link below which you should watch because it also outlines this IRS call and a variety of other tax scams that are currently being used that you need to be aware of: http://bit.ly/1AqjCvP

 

Jan 30
Love0

A Macro View – Plunging Oil Prices

By General

Largely due to the price wars among major world oil producing countries, the crude oil price has tumbled more than 50% since last summer.  The magnitude of the drop within such a short period is astounding and has caused great confusion regarding its impact.  How will it affect different sectors and companies? Is it overall a good or bad thing for investors?

There is no doubt that plunging oil prices is a disaster for the energy sector.  Hailed and embraced by many as a revolutionary growth sector for decades to come in recent years, the sector may suffer as much as the technology sector experienced during the aftermath of the explosion of dot com bubble.  However, the damage might not be contained to the energy sector, currently only 8% of the S&P 500 Index.  Industrial companies that supply equipment to energy companies may suffer, financial companies that lend money to the energy sector may suffer, lodging and leisure companies that serve mostly the energy companies may suffer, etc.  Some quintessential American industrial companies have already mentioned their exposure to the energy sector as a source of disappointment in their recent earnings release and more may come if oil prices keep plunging or simply stay at current levels.

There is no doubt either that plunging oil prices should boost consumer spending and thus the companies could benefit from rising consumer demand.   However, compared with the damage to the energy companies that is swift and relatively easy to quantify, there is a delayed effect on consumer behavior and it is far more challenging to quantify the benefit.  Corporate America, especially the energy companies, is the most capitalist and efficient entity on earth.  Energy companies essentially drill for profit/money not for oil and they have already reacted to plunging oil price through merger & acquisition, cut in spending and mass layoffs.  Unlike Corporate America, consumers do not react to oil prices in real time.  Just because a consumer saves $100 last month on gasoline does not mean they will “pre-spend” $1,200 projected savings of next year or even spend $100 more next month.  The average consumer probably has not figured out the amount of the savings or does not even bother to do so yet.  Plus, they might be skeptical on how long oil prices will stay low.  It takes time for consumers to change their spending behavior and boost their spending even if they are convinced that low oil prices are here to stay.

It is even trickier for companies that may potentially benefit from rise in consumer demand to figure out the exact benefit.  Consumer discretionary companies in theory are the biggest beneficiaries of plunging oil prices, as consumers can spend their gas savings on things like restaurants, clothes, etc.  However, this is also a very competitive sector and gaining advantages over their competition is far more important than how to benefit from macro factors, such as lower gasoline prices.   That is why while energy companies and other potential “victims” of plunging oil prices are busy slashing their earnings projections, very few potential “beneficiaries” advertise their good fortune.

In conclusion, the damage of plunging oil prices to the affected companies is generally front-ended and relatively easy to quantify.  The potential benefit is more back-ended (the time lag effect) and difficult to discern.  While low oil prices are a net positive for the U.S. economy and companies, especially in the long run, the sudden change is likely to cause confusion and turmoil in the short term.

Jan 22
Love0

5 Things to Know About Eurozone QE announced today

By General

HOW MUCH?

The European Central Bank has finally decided to use a policy tool that has already been employed by the U.S. Federal Reserve, the Bank of Japan and the Bank of England. It will buy a mix of government and other bonds at a rate of €60 billion a month until September 2016 at least, and possibly for longer, using freshly created money in an effort to reverse a fall in consumer prices that began in December, and raise the inflation rate towards its 2% target.

WHAT IS IT?

Known as quantitative easing (QE), the policy is employed when interest rates have hit zero and is an alternative way of providing monetary stimulus. The policy is intended to work by lowering long-term interest rates, thereby encouraging investment, which has been very weak in the euro-zone. It also signals to consumers and businesses that the central bank is committed to reaching its inflation target. Raising inflation expectations is another way of lowering the real interest rate.

WAS THERE CONSENSUS?

The 25-member governing council’s wasn’t unanimously in favor of the new program. While the vote breakdown will not be published, it’s likely the decision was opposed by the two German members, and possibly others. German policy makers don’t believe there is a risk of deflation in the euro-zone, while Germans also worry that QE is a form of central bank financing of government deficits, a taboo in the euro-zone’s largest members. German policy makers also fear it will ease pressure on governments to press ahead with painful economic reforms.

HOW WILL IT WORK?

Each of the 19 central banks in the euro-zone will buy bonds issued by its own government, and take the losses should that government default. That’s intended to prevent taxpayers in one country from taking a hit from debt problems in another, but critics say it raises questions about the coherence of the euro-zone, revealing deep, underlying splits within the currency area.

HOW WILL IT HELP?

One immediate way that QE may aid the euro-zone’s economic revival is by pushing the euro lower against other major currencies, or at least ensuring its depreciation since May isn’t reversed. That could help exporters and increase output, while it could also help raise inflation by making imported goods and services more expensive in euro terms.

Click here to see charts that explain the above: http://on.wsj.com/1BiLtBw

(Source: WSJ)

Jan 13
Love0

The Largest Wealth Transfer In History Is About To Begin

By General, Retirement

In the next thirty years, it is estimated that over $16 trillion will be transferred to a younger generation as the ultra-high net worth individuals (those with wealth in excess of $30 million in assets) pass their wealth on to their children.  Of this wealth, at least $6 trillion is expected to occur in the U.S. Most of those passing on their wealth will be first generation, or self-made individuals, or those that have little or no experience with wealth succession planning.  Without adequate planning, up to half of these fortunes may be captured by inheritance taxes, as estate taxes can be as high as 50% in some developed nations.  Source:  Wealth-X and NFP Family Wealth Transfers Report.

Dec 31
Love0

Dow posts its 6th consecutive positive year in 2014

By General

The Dow Jones Industrial Average on Wednesday fell 160 points, or 0.89%, to 17823. Still, the Dow was up 7.5% in 2014, its sixth-consecutive yearly gain.

The S&P 500 declined 21.45 points, or 1.03%, to 2058. For the year, it rose 11.4%, its third-straight annual gain.

The Nasdaq Composite ticked down 41.39 points, or 0.87%, to 4736. It was up 13.4% in 2014, also marking its third-straight annual gain.

(Source: WSJ)

Dec 30
Love0

Will the S&P 500 continue its 6 year winning streak in 2015?

By General

Going back to the late-1920s that would be tied for the third longest streak of all time. The longest streak was from 1991 to 1999 when the market reeled off 9 years of gains in a row. The second longest run of positive annual returns were from 1982 to 1989 when stocks rose for 8 straight years. Not only is the S&P up 6 years in a row, but it’s also up 11 of the past 12. In those 12 years the S&P 500 is up 9.6% per year, right at the long-term average.

Dec 19
Love0

A Macro View – The “Patient” Fed

By General

In the statement after the FOMC meeting of December 17th, the Federal Reserve Bank (“Fed”) states that “it can be patient to normalize the stance of monetary policy,” a change from the statement of the previous meeting (October 29th) that “it likely will be appropriate to maintain the 0 to 0.25 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program.”  During the press conference following the statement, Ms. Yellen further clarified that patient means that the Fed is unlikely to start raising the federal funds rate for “at least the next couple of meetings.”

The swap of “considerable time” for “patient” is overall a neutral statement, neither more hawkish nor more dovish.  On one hand, by removing “considerable time,” it officially acknowledges that it may raise the federal funds rate in 2015 if warranted by data.  The combination of “patient” and “at least the next couple of meetings” essentially eliminates the early 2015 rate hike scenario.  Rate hikes following the January and March 2015 meetings are all but impossible, and April and June hikes are also extremely unlikely.  As arguably the most sophisticated central bank in the world, any rate hike during the first half of 2015 will be considered a rush job or a panic move that will surely endanger its credibility and disrupt global financial markets and the world economy.  The statement essentially narrows the window of the first rate hike to 2H/2015 from a wide range of early 2015 to 2016.  Following the statement, Treasury yields mostly little changed with the two-year yield, the closest proxy for the federal funds rate, rising to 0.619% from 0.554% on the previous day close.

This is not the first time for the Fed to transition from “considerable time” to “patient.”  In the 12/9/2003 FOMC meeting statement, near the end of that easing cycle, it stated that “the Committee believes that policy accommodation can be maintained for a considerable period.”  The next meeting though (1/28/2004), the statement became “the Committee believes that it can be patient in removing its policy accommodation.”  And on 6/30/2004, two meetings later, the federal funds rate was raised by 25 basis points (bps) to 1.25% from 1.00%.

In contrast to lowering rates, the Fed is indeed patient in raising rates.  Excluding the Volcker period, when Paul Volcker had to raise rates aggressively to battle runaway inflation during the 1970s and 1980s, it raised the fed funds rate almost always at the slowest, 25 bps pace.  For the aforementioned last tightening cycle, it raised the fed funds rate 16 more times, each at 25 bps, after the first hike.  It took two years, 17 consecutive 25 bps raises for the fed funds rate to rise from 1.00% to 5.25%.  The last 25+ bps raise took place on 5/16/2000, when the Fed raised the rate by 50 bps from 6.00% to 6.50%, but this was very much a “one and done” move as it was the last raise of that tightening cycle.

The Fed, however, is far more aggressive and impatient when lowering rates.  It took the Fed just a little over a year to cut the fed fund rate from 5.25% to 0 – 0.25%.  Starting with a 50 bps cut on 9/18/2007, it followed through with multiple 50 bps and 75 bps cuts before it cut the rate from 1.00% all the way down to 0 – 0.25% on 12/16/2008.