The Family Firm

I'm assuming most of us realize the US stock market has gotten off to a fine start in 2012.  +4.7% year to date.  This ranks 33rd out of 78 countries worldwide.  With 59 countries up and 19 down it appears diversification is off to a decent start in 2012.

Any guesses as to the best and worst performers so far?

The best: Argentina +18%, Russia, Hungary, and Greece. Yes, that is not a typo, Greece is up 12% in January.

The worst: Qatar, Jamaica, Sri Lanka, and, finally, Bangladesh checking in with a -15%.

Industrial production in Italy fell by 0.9% in October and is down 4% from last year. In Germany industrial production is up, unemployment is down.

So is it really hard to comprehend that for the typical German the reaction is "Crisis, what crisis?" and that they are going to remain more convinced than ever (with justification that should be fairly obvious) that their model is vastly superior?? Yes, their stock market has fallen in concert with other European nations but the economic fundamentals are starkly better.

As written here earlier, I expect Merkel to take a very hard line with the spendthrift countries, and I expect Germany's philosophy to ultimately prevail.

Just read where the number of US companies traded on the stock exchanges has fallen from over 7000 to roughly 4000 today.  High profile IPOs like LinkedIn and Facebook still get the big publicity, but is it worrisome that more and more companies seem to be going, or staying, private?

This is addition to what continues to occur in the international markets, where government owned, or sponsored, firms continue their dominance. In fact, this dominance appears to be gathering strength. Also, family owned firms, such as Tata of India, continue to expand their influence. None of these trends appears very promising for outside investors.

What are the implications for investors? To be determined....

House prices continue to fall, 5 years into the depression. -4% nationally over the past twelve months.  But not everywhere! In DC metro prices rose by 1% over the past year; but that does not earn the number one ranking, that would go to Detroit where prices rose 4% over the past twelve months. Hmmm...something tells me that over a longer time horizon Detroit wouldn't look so good. But then again, everything eventually hits bottom and maybe that is encouraging for the 90% of cities who continue to experience falling prices.

As you can all imagine, I am frequently asked my opinions on the various economic circumstances (crises?) of the moment and if there is a stock market crash in our immediate future. I recently had a short email exchange with someone and I thought I'd share part of that here.

The primary question was whether the ongoing European drama would cause a worldwide stock market crash. My (edited for consistency and to protect privacy) response:

Any time I try and answer questions like these I have to remind myself to always say “no one knows”.   That is so true, and it can’t be said enough.

For the short term, I feel it is virtually impossible to predict the direction of the markets. Well, let me say that more honestly…I believe, and the data seems to bear it out, that it is impossible to predict the stock market in the short term.

But with all that said, I am happy to opine on various factors that may or may not cause a stock market plunge.   US political dysfunction, no; my belief is that expectations are already so low that they are extremely unlikely to be surprised on the negative side.  (btw, it is the negative SURPRISES that cause market declines/crashes). 

On the question of Europe , that one is trickier. I do believe that if 5, 6 or more European nations decide to renege on their obligations that this would cause a financial crisis and the stock market would plunge. That is not what the expectation is, and that is not what my personal expectation is. What I see occurring now is a very high profile negotiation between the spendthrift nations, let’s call them Greece…and the fiscally conservative nations, call them Germany. Germany is not going to write a blank check to cover Greece’s obligations. Greece is going to negotiate hard because they know that Germany knows that a Greece default harms Germany. Germany is going to negotiate hard because they know that Greece knows that a Greece default is catastrophic for their own people. So there we have it, this will continue and, in my opinion, in the end, after continued scares and mini-panics, Greece will consent to becoming more like Germany.  (they will use some fancy financial engineering terms to try and disguise this).   For Greeks this will be extremely difficult, for the investors this will be good news.   But again, all this is armchair speculation; I do not know if these negotiations will work, or if they don’t, if there will be a default from one or two countries (manageable) or widespread (disaster). But honestly, under that kind of scenario, where nations feel free to walk away from their debts, there will be no safe place for an investor, including cash. Imaginations fail at that stage.

Oh, one last thing….as stated above….I do believe it’s impossible to predict the stock market in the short term….and I also believe it is very easy to predict the stock market for the long term…it goes up.

Thanks! Nate

This for the optimists:

Mortgage delinquencies fell to just below 8% in the 3rd quarter of 2011. Good news! The lowest rate since Q4 2008.

And this for the pessimists:

The delinquency rate rarely exceeded 5% for the prior 30 years.

Just some thoughts when considering purchasing municipal bonds from a particular state. Of course, as a potential creditor of that state, what you are looking for is assurance your loan (bond) will be paid back. So what are some important factors to assess? We'll use our "home state" of Maryland as an example.

How's the economy? Maryland's is superior with an unemployment rate approximately 2 full percentage points below the national average and per capita income 20% above the national average, ranking 4th among states.

How about the finances? In Maryland's case, revenues have been growing strongly, yet the state itself is faced with large deficits and lack of clarity about future revenue streams. That being said, the rainy day fund is sizable.

How about debt? Maryland does have a higher debt load than the average state. Also worrisome is the large unfunded liabilities for its pensions and benefits plans.

What do the credit ratings agencies say?  Maryland maintains the top ratings from all services, although Moody's has a negative outlook on the state's condition due to its large reliance on federal government spending.

And finally, all of this needs to be weighed against the bond yield, and the individual's own personal circumstances and tax bracket.

Terrific article by Michael Lewis in Vanity Fair

California and Bust

I know it's a long read, so here is the paragraph I found most arresting. I challenge anyone to read this and not feel a sense of despair.

In 2010, for instance, the state spent $6 billion on fewer than 30,000 guards and other prison-system employees. A prison guard who started his career at the age of 45 could retire after five years with a pension that very nearly equaled his former salary. The head parole psychiatrist for the California prison system was the state’s highest-paid public employee; in 2010 he’d made $838,706. The same fiscal year that the state spent $6 billion on prisons, it had invested just $4.7 billion in its higher education—that is, 33 campuses with 670,000 students. Over the past 30 years the state’s share of the budget for the University of California has fallen from 30 percent to 11 percent, and it is about to fall a lot more. In 1980 a Cal student paid $776 a year in tuition; in 2011 he pays $13,218. Everywhere you turn, the long-term future of the state is being sacrificed.

Will we, as a society, be able to address these issues before the ultimate disaster hits???  Perhaps it's just the Monday morning blues, but I find it increasingly challenging to remain optimistic.  

Our friends at Directions (www.directionsforwomen.com) just released this fact sheet about financial issues concerning women.  Did you know that 56 percent of women over 65 are not married, compared to 25 percent of men?  Read on for more interesting research and statictics. Women's Worth July 2011

In this article, Bethany McLean, one of the best financial reporters we have, compares the relative creditworthiness of France and the US, and ponders why France has retained its AAA credit rating, while the US didn't.  Its becoming clearer and clearer why the universe of investors - to a large extent - pretty much ignores the credit rating agencies.

http://www.slate.com/id/2301845/pagenum/all/#p2