money in motion

The Choice Between Volatility and Income is an Important Choice.

2012-01-17T21:05:00.002-05:00

Year End 2011 and out look for2012

2011-12-24T15:09:00.000-05:00

Fuzzy math on the jobs numbers

2011-12-06T19:04:00.001-05:00

US Bank Stress Test

2011-11-29T08:42:00.000-05:00

The Fed wants to find out if our major banks can survive a significant down turn in the US economy,

Super Committee Markets

2011-11-27T20:41:00.000-05:00

Limit Orders

2011-11-27T20:39:00.000-05:00

Limit orders limit risk

2011-10-26T18:50:00.002-04:00

Click on the link below to see how to use limit orders can make you a smarter and more successful investor.

Dan Perkins

The quarter is over but the new one started of ugly

2011-10-04T18:00:00.001-04:00

In this video blog I talk about the last 90 days and the possibility of a bear market. We went into today's with the S&P 500 down 19.4% from the high in April and down almost 14% for the year.

I want to thank all of you who have commented that you really like the video blog. I have to tell you I was surprised at all the positive reaction. I will continue to work on improving the production value to try and make it the best I can for you. Click on the link below or copy and paste it in you browser.

Dan Perkins

A very difficult two days

2011-09-25T18:10:00.002-04:00

Wednesday and Thursday this past week were in one word scary, In the new better quality video blog I talk about the causes and what is likely to happen as a result of this significant sell-off.

Highlight the link and use your cursor to "open the link"

Dan Perkins

http://www.youtube.com/user/moneyinmot?feature=mhee#p/a/u/2/e-BejgkmA94

Two Stocks added

2011-09-25T17:53:00.003-04:00

This is my first video Blog. In it I will discuss two new additions to our portfolio Bank of New York Mellon and Clean Energy. The reaction to this first video blog was very surprising to me. I found more people either wrote or called to tell me how much they enjoyed and that listening made it easier. I'm still new at this and I want to improve the quality of the work so come watch and see if I grow. To watch this video highlight with your curser and click on "open link" to view it.

http://www.youtube.com/user/moneyinmot?feature=mhee#p/a/u/2/e-BejgkmA94

Dan Perkins

Dangerous Assumptions

2011-09-11T12:25:00.000-04:00

The hype in advance of the President’s speech to Congress and the nation Thursday was that the president had a proposal to solve unemployment and fix the slowed economy. I have some real concerns about the speech and the assumptions that were made by the President and supported by news pundits. The press intimated that the president was proposing a suspension of the payroll tax for the next 12 months when in fact it would only be halved for 12 months.

Another assumption is that payroll tax savings will put money in people’s pockets which they will spend and that, in turn, will create jobs because demand will make companies hire to meet the increased demand. Let me offer an alternative thought as to what might happen to the non-stimulus money estimated to be between $1,000 and $2,000.

No doubt some will spend the $1000 right away as the president suggests. It is important to point out that the $1,000 will not be paid in one lump sum, but over the employee pay periods. If a person is paid every two weeks then the savings through the reduced payroll tax is about $38 dollars each for the employer and employee. Let’s say that the savings is twice that amount $2,000 so that every two weeks you have $76.

I think people are concerned about their job and their bills. Their retirement account values have declined and the interest rates on savings is close to zero. Many people will, out of fear and uncertainty, put this money in the bank to try and save it to protect themselves and their families for as long as they can. Many Americans have depleted their savings and even though the interest rates are close to zero they will feel better with some money in the bank. I think the great spending spree to jump start the economy will not happen.

The employer will have a reduced payroll tax for one year. By the way, calling it “payroll tax” really means, or is code for, “social security taxes”. The President doesn't want to be linked to any changes in social security so that is why he doesn't refer to this as social security. Another example of this word game is calling tax increases revenue enhancements as to what it really is a tax increase.

There is a one-time tax credit for hiring a long-term unemployed or a returning vet. These changes are for one year only. Most businesses, large and small, don’t make decisions based on one year. One of the big problems causing businesses to be reluctant to hire people is that they do not feel that they know what is going to happen in terms of rules, regulations and cost for existing much less future employees. The bureaucrats in Washington have not yet developed the rules for new laws so businesses don’t know how the new rules will affect them. Until businesses feel comfortable that they can depend on stability of how they operate their business they will not hire people to try and expand.

Again, payroll tax is code for social security taxes. The President is suggesting that we extend the reduced contributions for every American earning salary and wages for another 12 months. For two years we will, if it passes, underfunded social security, a program that most everyone agrees is in trouble of running out of money. I guess if you call it something different, that is “payroll tax” instead of “social security tax”, you don’t have to deal with the new problem under funding creates.

It is proposed, for the second time in two years, that teachers, police, and fireman receive money from the Federal government to save their jobs. Does it seem strange to you that all of the people who are going to get paid to keep their jobs are members of a union. We pay our taxes on a state and local basis to pay for teachers, police, and firemen and we would now be paying again out of our Federal tax dollars to keep them employed.

At the end of 2010 state and local governments employed over 16.6 million full time equivalents. In 2010, a mere 200,000 state and local workers lost their jobs. I'm not saying the the loss of a job can be devastating, it can but the public sector employees have not experienced the pain the rest of the country has over the last three years. We’re trying to protect their jobs, but what about the rest of the unemployed? Right the president wants to extend unemployment benefits to 99 weeks. Who do you think will make more money the teacher who's full pay is saved or the construction worker that has to try and live and support his or her family on unemployment?

Lastly, how do we pay for the $450 billion in the non-stimulus jobs bill that the President wants Congress to pass now? The bill has not been written yet so perhaps we should think the way the former speaker of the house Nancy Pelosi felt about the healthcare bill, “we have to pass it to find out what is in it.”

Dan Perkins

Investment Guaranteed to Pay Zero for the Next 3 Years. Want It?

2011-09-01T11:19:00.002-04:00

For most of the last three years, the rate of interest in money market mutual funds has been zero, especially US Government Money Market Funds. Fund managers and investors were hanging on, thinking that the Federal Reserve would start raising interest rates and make money market mutual funds viable once again. Most people who own these funds do not know of a provision granted to fund managers by the SEC. This provision is called the “claw back” provision. The benefit to the fund companies is that when the funds reach the point that the yield is greater than the cost to run the fund, the managers who have been waiving their management fees can start collecting fees for the most recent three years.

I have been saying that we are in a Japan-style recover, in that we have low growth, high unemployment and, most devastating of all, especially to seniors, low to zero interest. Until two weeks ago, hope still abounded that the Fed would increase interest rates soon. The Chairman of the Federal Reserve said, in no uncertain terms, that the Fed would keep interest rates at the current level until at least the 2nd quarter of 2013, two years from now. By the end of that week, Merrill Lynch said that they thought it will be, “at least 2014.”

If you have money in a money market mutual fund, you can expect to earn zero return for the next two to three years if you stay in the fund. If you have been in the fund since the end of the third quarter of 2008, your return has been zero. If you stay and Merrill is right, you will be looking at 6 years of zero return, guaranteed.

Many say, “At least I will not be losing money.” Au contraire. Just look at the chart below of the CPI from the end of 2007 to July 2011. If you do the math, the loss in real value would have been 5% of your money to inflation. If you started 2008 with $10,000 in a US Government money market mutual fund, three years later you lost $500 of purchasing power. If, in fact, the Fed is on hold for two more years and you stay in the fund and inflation stays the same as it has been for the last 3 years, your loss in real dollar terms could approach $800. Yes, Virginia, there is a Santa Claus and you can’t lose money in a money market mutual funds are both myths rather than fact.

I have had clients contacting me asking for advice for friends and family who were living off the interest in money market funds and social security and who are now having to spend their assets to pay their bills because the fund pays no interest. My greatest fear for millions of Americans is that they are reaching the point that two to three more years of no return will be devastating to their lifestyle and the quality of life they will have going forward.

The banks have seen significant inflows of deposits because they are paying better interest rates than the money market funds. The banks find themselves flush with cash and are trying to discourage deposits by dropping interest rates. (Go to bankrate.com and look at the declines) Banks are taking it in much faster than they can loan it out. I know of one money center bank that said it,“Needs to reduce deposits by $2 billion.”

I realize that all of us need some money invested short-term, but not the amount that is currently invested in money funds. Those of you who are my clients know that the title of this blog is exactly how I manage money for them. Money has to be working for you all the time; your money has to be in motion. Earning zero percent on a money market mutual fund is not money in motion and when you adjust for inflation, you are really losing money.

I know that this blog gets circulated many times by the people I send it to. If you are a second-hand reader and need help or know of someone who needs help, send me an e-mail.

Dan Perkins
Dperk1857@aol.com

Have Politicians Closed the Barn Door After the Horse is Gone?

2011-08-08T16:43:00.000-04:00

By now you have heard that S&P has downgraded the sovereign credit rating of the long-term debt of the United States from AAA to AA+. The markets, both stock and bond, will be sorting out the implications of this historic downgrade for some time. I found it interesting that the administration challenged the accuracy of the number used by S&P to come to its conclusion. The administration and the Congress are in denial and that is not a river in Egypt. The administration wants to chastise S&P for their math when the Administration and the Congress can’t get the math right and hasn’t for decades.

S&P made it very clear that the Federal government has serious deficit problems and that the level of debt to GDP was beyond what they believed was acceptable for a AAA credit rating. S&P made it clear that we needed to reduce our deficit by at least $4 trillion in order to maintain the AAA credit rating.

Telling someone that they need to reduce their amount of debt to keep their house in order happens to all of us. If we go too much in debt our credit rating declines and we have to pay more if we want to borrow more. We can reach a point when we have borrowed so much that we can’t afford the payments and we default. So, the players in the budget battle knew what they had to do and they flat out didn’t do it and S&P was forced to issue the downgrade.

In one of my blogs during the deficit battle I said that we are not reducing the deficit. Both bills will add an additional $9 trillion to the national debt in 10 years instead of $10 trillion. We didn’t cut the deficit we slightly reduced the speed of its growth.

Now that the horse is out of the barn will anybody care about the downgrade? The US Government bond market is the largest and most liquid in the world. No other market can handle the volume that our markets can process on a daily basis. Again, will anybody care?

Most people in America have no idea what the downgrade means. Over the next 12 months you can bet that the discussion of the size and cost of government will move up the ladder of importance right along with jobs. Look for the conservative right to blame the President because the downgrade came on his watch. He is responsible for 43% of the debt we have on the books. Congress is not without blame. They knew what it would take to save the credit rating and they failed to act.

I think one of the outcomes of the downgrade will be the cry from the voters to throw out both President and Congress in the 2012 election. If they forgot to lock the barn door they have to face the consequence of their actions. Let me point out that all the blame doesn’t rest with the president and the current Congress. Previous Congresses and Presidents are to blame for allowing the deficit to get out of control. While we can’t do anything about the past, we can do something about our grandchildrens future. The first thing that has to go is baseline budgeting. We can no longer allow the Federal government to raise the budget by 8% every year regardless of the income it receives. Baseline budgeting is causing us to borrow 40% of our yearly operating budget continually adding to the debt burden. The second thing we need to do is put in incentives for business to grow jobs. More people employed will mean more tax revenue to reduce the debt.

We must get rid of our mountain of debt. Only by making us free from the burden of debt can we be free to be the best that we can be.

Dan Perkins

What Both Parties are not Telling Us About the Budget and the Deficit

2011-07-27T13:46:00.000-04:00

Lets compare our home budget to the Federal Budget. Say our gross income is projected to be $100,000 which is subject to State and Federal income taxes; after which we have $70,000 to spend. Through the next 12 months, assuming we don’t have to replace the roof or the car, we have $70,000 to spend and that is it. We could take out a home equity loan and/or take our credit cards to the max but once we max out everything, if we can’t make the payments we have to file bankruptcy.

Now let’s look at what the Federal Government does under its “Baseline Budgeting.” It starts off with the concept that its budget is based on an increase in annual spending of 7% regardless of the income the government receives.

The basic principle of how long it takes money to double is to divide 72 by the rate of return. If you earn 7% and divide 7% into 72 it will take just over 10 years to double your money.

The same principle applies to how long it will take the federal budget deficit to double. With Congress using a 7% increase as a baseline, the annual budget deficit will grow from $14 trillion this year to $28 trillion in 10 years. If we look at the deficit plans on the table, they are projecting a $1.2 to $2.4 trillion reduction over the next 10 years, if everything stays the same. If we take the higher savings of $2.4 and everybody keeps their promises the deficit will not be $28 trillion, but perhaps $26 trillion up from $14 trillion. Yes with $2.4 trillion in real budget cuts the deficit will just about double in 10 years, so how did we make any progress on the deficit?

These plans, which are reported to be budget cuts, are merely a reduction in the growth of the deficit. As I said in the July 6th Blog “You do the Math,” we are currently spending $1.4 trillion annually. If we take the $2.4 trillion over the next 10 years that will average $240 billion a year in reductions. That is only if Congress stays to its commitment to reduce $2.4 trillion. With a baseline budgeting process using the $1.4 trillion, a 7% increase the next year will add $98 billion more to the deficit this year.

Now lets go back to our home budget. How will you find the money to pay for the increases of 7% in your budget each year for the next 10 years if you have no credit left? The bottom line is, you can’t. Remember you read it hear, next year when you hear, that the budget deficit is higher than it is this year. I believe that Congress wants to keep us in the dark about the reality of what is going on in Washington.

I want you to call your Congressperson or Senator and ask him/her about “Baseline Budgeting” and see if he/she can tell you what it is and what the deficit will be next year.

Dan Perkins

Reference: http://www.patriotupdate.com/oldsite/stories/read/6503/Baseline-Budgeting-and-the-Cost-of-These-Non-Existent-Tax-Cuts-

Debt Crisis to Constitutional Crisis

2011-07-27T10:10:00.000-04:00

Debt Crisis to Constitutional Crisis

FLASH

On Monday I saw the video of a recent speech by the President to his base and I believe he sent up a trial balloon and he got a great response for his base, but nothing from Congress. He suggested that if we got down to the last minute and the Congress fails to act he might raise the debt ceiling on his own through the use of the Executive Order.

I will admit that he said this jokingly, but he said it I believe to test the waters and see what reaction he would get from the hill. To the best of my knowledge he got no reaction from either party. Perhaps both parties know of the speech and do not believe that the President would do such a thing. I do not believe that he said it if he wasn’t thinking about it and the possibility of the use of the Executive Order.

So, if we come down to August 2 and the President has nothing to sign from the Congress he may well sign and Executive Order to raise the debt ceiling on his own. My guess is that he would go on TV and tell the American people that he has been diligently working with the Congress to solve the debt problem and the Congress is so split that they will never pass a debt limit extension and so as President he is using his powers and is signing an Executive Order to raise the debt limit to prevent a default by America.

He fully understands that the constitutional right to raise the debt limit rest in the Congress, but for the good of the country, to protect social security benefits and to pay our soldiers among other debts of the country he was force to act because of the inability of the Congress to act.

I know that some in Congress will be outraged and I understand and appreciate their outrage, but perhaps my action will unify the Congress to come up with a fair and balanced approach to the deficit problem and get me a bill I can sign.

As outrageous as this seems in my mind it could happen.

Dan Perkins

Will the Outcome of the Budget Battle Signal the Demise of the Democratic Party?

2011-07-25T21:54:00.001-04:00

I warned you to watch the bond market and the direction of interest rates for an indication of the possible outcome of the deficit deal. Up until the middle of last week the bond market was suggesting, based on the level of interest rates, that there would be a budget deal. As of the close on Friday I’m no longer sure there will be a deal by August 2nd.

During the American Civil War there was a “high water mark” which the Confederacy reached and then started it’s long decline to surrender. At the time the high water mark happened nobody knew that it had been reached. The Civil War “high water mark” was the bloody angle in the third day of battle at Gettysburg,

Perhaps the Democratic Party reached its high water mark with the passage of the universal health care legislation. We are at a stale mate in direction as to how to solve the debt and deficit problems in the United State. The Democratic Party says they are willing to make budget cuts but the “rich” have to pay more. They say they want the tax increases now and will make the budget cuts over the next 10 years. This idea is like the Ole Miss direction play in football. Try and convince your opponent that you are going one direction and then go in the opposite direction.

In the past when we have had one of these confrontations the Republicans have been the party to cave and they may well cave again this time. They seemed to have staked out the ground that insists on cutting expenses and not raising any new taxes.

If the Republicans hold their ground and the Democrats agree to entitlement cuts the President will lose his base and the Democratic Party will start to decline from the “high water mark.” If the Democrats lose the Senate and the White House in the next election it will be based on the Democratic failure to respond to the public need to restrain the budget. How can we tell Greece, Spain, Portugal, Ireland and Italy that they must adopt austerity programs while we continue to spend and spend and get deeper and deeper in debt ourselves? Is that a misdirection play on the part of the United States?

As much as I hate to say it, I do not think we will find a solution by August 2. I know that everybody knows the outcome, or they think they know the outcome if we fail to act. The ground that has been staked out by both parties will not allow them to give in and find a solution. The one question that lingers in my mind is do they care if we default? Would Democrats rather see the country go in default rather than give up their entitlement programs? I think so. Would Republicans rather hold the line on tax increases at the expense of the country going into default? I think so.

I think, in either case, the great social programs that started with FDR are history and it is only a short amount of time before it all unfolds right in front of us. As I said before, watch the yield on the 10-year T-Bond as we get closer to the deadline.

Dan Perkins

Does the Glitter have a little Tarnish?

2011-07-10T22:36:00.000-04:00

I can take no credit for this blog idea. It came as a result of a discussion with a client. That client sent me an e-mail saying he was thinking about selling out his equity funds in a brokerage account and using the proceeds to purchase gold. He was very concerned about what might happen with the debt ceiling if congress and the president can’t agree and we go past August 2nd with no settlement.

I want to interrupt this story for just a moment. I have grave concerns that while the leadership may come up with a deal it is no guarantee that the full house and Senate will vote to agree with the leadership. No one is talking about the possibility that the plan might not be confirmed. The president and both parties leadership agreed on a plan to deal with the financial crisis three years ago but do you remember the House didn’t carry the motion. We have a Republican controlled house with a lot of Tea Party congressmen who may vote the bill down.

Meanwhile back to our story. My client is concerned about inflation, the falling value of the dollar and the possibility of default on government paper. He feels like he needs some protection and buying gold will give him the ability to pay for food and other necessities. So he ended his note to me asking me what I thought about his idea, I did a great deal of thinking and decided that all of you could perhaps benefit from my thoughts.

My most immediate idea was to suggest the GOLD Exchange Traded Fund (ETF) IAU. The price was just over $15 on this past Friday. The ETF is a way to own physical gold on a shared basis. I sent my client this first idea and he came back to me that he wanted to own the bullion not share in a fund. So, I went to work to see what I could do for him. My research showed that bullion was the lowest cost to own. I found the non- numismatic coins have the least costs and the highest liquidity. So, I concluded that the non-numismatic American Eagle coin has the most liquidity and it is legal tender, sort of. At the time of this posting the spot price for gold was $1,541.60 and the best price I could find on the web for a one ounce American Eagle coin was $1,895. So the coin has a 20% premium to the spot price of gold. Seems a little rich.

Next I went to Goldline.com to see what they had to say about the cost to buy and sell gold. I did a little deep diving on the site on the risk and disclosure section http://www.goldline.com/buygold-investmentriskdisclosure#A there is a subhead called Our prices and it says the following: “There is a price differential or "spread" between our selling price (the "ask" price) and our buy-back price (the "bid" price). This is often referred to as a "transaction cost." A typical spread on our most common bullion coins (e.g. Canadian Maple Leaf or South African Krugerrand gold coins) may range from approximately 5% to 20% depending on the coin though spreads may increase based upon market conditions, availability and demand. Our spread on semi-numismatic coins, rare or numismatic coins and rare currency currently ranges from 30% to 35%. To illustrate how this spread works, consider the following example. If the spread on a coin is 35% and Goldline's ask/sell price is $500 for the coin, then Goldline's bid/buy price is $325. Your coin must appreciate more than $175 to earn a profit. If you choose to sell your coin back to Goldline, you must also pay a 1% liquidation fee. Purchases of less than $1,500 are subject to a small lot fee of $15.”

If you buy gold for $1,545 and the American Eagle is selling for $1,895, gold must rise to almost $1,900 for you to break-even. All the time it takes for your investment to break even you will be making nothing, no dividends. Now let’s go back to the question of paying for things and I’m going to be a little absurd. You walk into the quickie mart to buy gas and coffee. Are you going to give the guy behind the counter an American Eagle? I don’t think they have a slot in the cash register for American Eagles. Is he going to give you gold in change or American dollars? My guess is American Dollars which just what you are trying to avoid. Most likely you will have to go to a coin store and sell your coin for dollars if they are open when you need to exchange and they are buying the day you need to sell.

Now the next issue is what do you do with these American Eagles once you own them? Do you have a safe installed in the house to keep them secure? In the case of this client I know they have two homes. Will they get a safe in each house? Will they carry the coins in the car as they travel and take it into the hotel room or put it in the hotel safe? My guess is that they would want to substantially increase their homeowner’s policy for the amount of gold they own. I don’t know how much it costs to insure say $150,000 in gold coin or if the insurance company will even insure that amount of gold. Perhaps you take them to the bank and put them is a safe deposit box. That would work as long as the bank is open when you need to get your coins.

I’m not trying to discourage you from buying gold. In almost 40 years in this business I have seen many gold waves come and go and many people get burned. In our example you need gold to move $300 just to break even not counting insurance, taxes, or transaction fees. Buying gold should not be viewed as an investment but as a hedge or insurance. You buy insurance on your house and even if you never have a significant claim, was it worth the insurance? Yes.

If you are looking at gold as an investment then I believe there are far better ways to invest than in gold.

Dan Perkins

You do the math and see how close we are to a deal on the debt limit.

2011-07-03T10:32:00.000-04:00

FLASH
This past week we found out 2 numbers from the President on he wants to settle the budget deficit and to raise the debt ceiling. The first is he wants $400 billion in new taxes and the second he is willing to cut $1 trillion from the budget over the next 10 years. Now look below at the spread sheet from the CBO which shows the projected deficit for 2011 is $1.4 trillion.

So here is the math $400 billion over 10 years is $40 billion per year of new taxes if it happens. A $1 trillion reduction in the budget over 10 years is $100 billion per year. If we get $40 billion in new tax revenue we will reduce the $1.4 trillion annual deficit by $60 billion or $5 billion per month. If we are running a $120 billion a month deficit then $5 billion a month doesn't even begin to solve the problem that my children and my expected grandson will have to pay if they have any money left.

You have better math send me a comment.

Watch the bond market over the next few weeks and it will tell you the likelihood of meaningful reform.

Dan Perkins

Interest rates skyrocketing

2011-06-30T12:16:00.000-04:00

FLASH

I suggested in a recent blog that the bond market didn't believe that the government would default on Aug 2. I also suggested that the stock market would possibly return close to its recent high.

The S&P 500 is up from 1261 on June 15 to 1320 as of the time this blog was written. I still think that the S&P 500 will get somewhere between 1360 and 1370 before the end of August. Of greater importance is the fact that in the same period of time the stock market was advancing the yield on the 10-year T-Bond has moved from 2.86% to 3.17%.

As you can see the yield on the 30-year has moved to 4.42%. If bond investors are beginning to focus on the deficit debate in DC I can see why they might be worried. Clearly the President rhetoric last night doesn't seem to offer any cooperation from the White House. The White House seems to think we need $400 billion in new taxes over the next 10 years to solve the problem. If the yield on the 30-year T-Bond gets past 4.75% the equity market could be in trouble perhaps sooner than I thought.

Below is the chart on the hedge we have been using the TBT which is a short of the long-term bond market. The TBT price action is the exact opposite of the bond market. When bond prices rise the value of TBT falls as interest rate rise and bond prices fall the value of TBT increases. The chart shows the dramatic rise in interest rates in the last 2 weeks affect on the price of the TBT. Watch the debate on the debt ceiling that will give you the direction on interest rates and the market.

Dan Perkins

If Greece Defaults Could it Bust the Buck in Your American Money Market Mutual Fund?

2011-06-28T09:29:00.000-04:00

Most Americans don’t know that 55% of all the assets in American general money market mutual funds are invested in European bank CD’s and commercial paper. Moody’s and S&P have warned that if Greece defaults many European banks who are massive holders of Greek bonds would find significant declines in the value of commercial paper and other cash investments.

I think that if the markets re-price the money market investments from these banks the American money funds will be forced to break the $1.00 net asset value. This "breaking the buck" on a wide spread basis will cause a major run on the money funds. The last time there was a run on money funds was in 2008 and 2009 and then the Fed put up $180 billion to save the industry, but I don’t think they will do it again, because we don’t have the money.

Changes ordered by the SEC last year in money market mutual funds didn’t, in my opinion, go far enough. The two problems that led the Fed to bail out the industry in 2008 and 09 were extended duration and lower credit quality. Both of these issues were designed to get higher yields and both backfired. With 55% of money funds assets in European banks these funds have too much exposure to these banks.

I said in an earlier blog that I felt we could see as much as a 10% correction from the top of the market for the year. If we are going to get that 10% we need the S&P 500 to hit 1225. The current 200-day moving average is around 1250. We hit close to that 1250 level on June 15, 2011 when the S&P 500 had an inter-day low of 1258.

My best guess, as of right now, subject to adjustment that I will talk about in a moment, is that we will not hit the 1225 level this time around. It looks to me like we could have a nice rally from this level back to the 1360 to 1370 level on the S&P 500 by the end of August, but no new high.

I think the Fall of the year could see a significant decline in the S&P 500, perhaps as much as 20%. If that 20% were to be reached then it signals a new recession. What could make my target come sooner rather than later? As I have indicated in several past blogs the debt ceiling is critical. If Congress does not extend the debt limit with spending cuts then I believe that interest rates will rise, stocks will fall and the dollar could go into free fall. We will feel like we are back in September 2008 all over again. The other factor could be a default by Greece or other countries on their debt. Watch for the votes on Wednesday and Thursday this week in the Greek Parliament for the austerity measures, also the budget and debt ceiling story for the direction of the markets and interest rates.

Dan Perkins

The Tale of One City. This is no Dickenson Tale

2011-06-23T13:09:00.000-04:00

The Harrisburg, state capital of Pennsylvania, is a town that I have driven through many times on my trek back to Columbus over the last 33 years. According to a recent analysis from the PA state Department of Community and Economic Development, DCED, Harrisburg is likely to end the year with a nearly $3.5 million deficit in its $58 million budget, and things are only expected to get worse. By 2015, the deficit is likely to be $10.4 million, which will eat up about 16 percent of the city’s general fund budget. It can’t be much surprise that the city finds itself essentially a ward of the state under the auspices of Act 47, a receivership program that is basically the final firewall between the capital city in the nation’s sixth-largest state and bankruptcy court.

“The City of Harrisburg is facing a direct, immediate and grave financial crisis,” the DCED wrote in a massive 422-page analysis of the government’s perilous condition. “The financial crisis is so severe that the City teeters uncomfortably on the verge of bankruptcy that could be triggered at any moment by parties outside its control.” The study further warns of possible “catastrophic results” in which bankruptcy might come from “the stroke of a judge’s pen.”

How did this happen?

Harrisburg, a city of 49,000 people, finds that its financial problems are multi-pronged, but started with what, at the time, seemed like a good idea; build an incinerator plant to deal with the solid waste not only for Harrisburg but perhaps other cities that were closing landfills and needed alternatives for waste disposal. This disastrous 2003 incinerator project that was supposed to be a revenue driver has ended up costing the people of Harrisburg millions of dollars in cost overruns and malfunctions. The city still owes $220 million on the bond issue to build the plant. The debt service on that project alone is $18 million per year, which amounts to nearly one-third of the entire 2011 city budget. How is it possible that a city that has a budget of $54 million per year can afford $18 million in interest payments and on top of that they still have to pay back the $220 million they borrowed to build the plant, They can't.

In short, irresponsible public spending combined with crippling fixed costs and an inability to grow have probably sent the City of Harrisburg into bankruptcy. My guess is that the state does not have the funds to bail out the city and take over not only the $220 million for the plant, plus the other debt of the city. Meredith Whitney has publicly stated that she feels we will see many municipal defaults at the city and local government level before things turn around. Harrisburg is one example of why I continue to shy away from municipal bonds and will do so no matter how compelling the value seems to be in the municipal bond market.

We are facing problems across the country where local and state government do not have the income to cover the liabilities already on the books. Some investors will lose some of their money. Keep in mind that even if you own insured muni bonds the insurance is only as good as the financial resources of the bonds insurers. If losses exceed assets the municipal bonds insurers will not be able to pay all the claims you will lose money even if you bought insurance protection.

Dan Perkins

Trust Preferred's over common

2011-06-13T14:56:00.001-04:00

This is why I buy preferred. The chart below shows a price change of Bank of America common vs, the preferred H which we own. The common came off its bottom but paid no dividend and has been falling back from its peak. The preferred came back and paid 24.4% in dividends in addition to the price recovery. This is a perfect example how being paid works.

Dan Perkins

So what is next?

2011-06-08T10:20:00.001-04:00

In my Blog of Sunday night April 30 I warned about the possibility of a correction in the commodity, stock and bond markets. From that time to the close of business today, June 7^th the S&P 500 is off just under six percent. Crude oil is down from about $115 per barrel to under $100, gold is up $3 to $1,530, and silver is down from $49.56 to $37.00. Housing in many sections of the country had prices fall to 2002 levels in the first quarter, almost all of this happened in just less than 7 weeks.

Last Friday the new jobs report came in, subject to later adjustment of course, at about 54,000 new jobs created and the unemployment rate went up to 9.1%. One side note about the 54,000 jobs; Morgan Stanley reported after the closing bell on Friday that they believe McDonalds created close to 30,000 of those new jobs. Not the best set of numbers for a president running for re-election, but more importantly not very good for the country.

While we added 54,000 jobs, the number of people looking for work increased and all those unemployment extensions will start to expire in late summer to early fall which could swell the ranks of the unemployed and drive up the unemployment rate. I think it will be hard to get support in Congress for further extension of unemployment benefits to those who have had three years of benefits. I have said to you in the past that the economy needs to create 250,000 jobs a month to hold the unemployment rate steady. Given that we have not seen the level of 250,000 for any period of time I have to believe that the unemployment rate will continue its upward direction throughout the balance of the year if we continue to see jobs reports like last Friday.

So, the big question is, “where do we go from here?” I got the initial down turn call correct--can I call the next move correctly? The one thing I believe will have the most impact on all the markets and the US economy will be the outcome of the increase in the Federal Debt ceiling. If we raise the debt limit with no meaningful budget reductions we are in real trouble. The credit rating agencies will downgrade US Government Debt quality and interest rates on our government debt will have to increase. The government will crowd corporations, state and local governments out of the bond market. If we lose our AAA credit rating, look for the dollar to fall substantially to record lows against all major currencies. We could see selling pressure by foreign investors in both the dollar and US Government bonds.

If that isn’t scary enough then think about this concept; some US Congressmen and Senators want the government to default on its obligations. It is important to them to punish the US. They believe that we must raise the debt limit and not cut the budget. In fact they want to spend more and they think by taxing the rich they will find the money to spend. I do not believe the well is deep enough for the rich to cover the current shortfall much less any increases. In order to try and convince the American people that we should raise the debt limit and spend more we will experience an onslaught of fear mongering to get the people to tell their elected officials to raise the debt and not cut the budget or benefits.

I’m afraid that if we don’t stand firm and cut the budget by a meaningful amount and seriously address the debt for our children and grandchildren we will not have the money to pay social benefits at any level. Speaker of the House, Boehner, said recently regarding the debt limit and the deficit, “we can’t kick the can down the road to the someone else to solve the problem.” If we fail on this issue then the scary feeling we went through on September 15, 2008 will be magnified many times over. This is such an import issue that if we let the genie out of the bottle we will never get him back and America will forever be changed for the worse.

Dan Perkins

Go back and look at my blog of Sunday April 30.

2011-06-02T16:33:00.001-04:00

Flash

In the blog I suggested that the bond market was telling us something different than what the stock market was screaming. The bond market was telling us that the stock and commodity markets were over priced and that the economy was slowing rapidly. I suggested that both the commodity and stock markets were headed for a correction. The first week of May both started a correction. The month of May economic releases showed that the economy not only in the United States but, around the world has hit, as some pundits are saying, are in a soft patch. By the way what is a soft spot?

These pundits don’t want to face the reality that there is a better than even chance that the economy will continue to lose steam through the summer. Calling it a soft spot is code for a slowdown or mini-recession. I actually heard a pollster suggest today the we have created 750,000 jobs and yet he didn't say that 1.4 million Americans have stopped looking for work in the same period of time. Based on the ADP payroll report on the past Wednesday many economists have substantially reduced the job creation report for this Friday. General estimates are for about 125,000 new private sector jobs and the unemployment rate to creep above 9%.

The number on Friday could be very disappointing or perhaps because of the reporting period be surprising to the up side. If the jobs report is above the 125,000 consensuses to anything above 140,000 then look for the market to rally in the morning. I would expect that after the morning rally this I would expect the market to fall off in the afternoon. Keep in mind that the market is down just over 4% since May 1, 2011. A normal correction in a bull market is 4% to 6% so we do have a little more to go. I think 1302 to 1305 are major support and a break through these support level could push us towards a 10% correction.

More later

Dan Perkins

Flash

2011-05-11T21:02:00.000-04:00

Flash

The S&P sold off again today hitting its low for the day of 1336.36. We bounced off the low to close at 1342. 08. The level of 1335 is significant support for the index and well worth watching. If we were to close below this 1335 level then we could go all the way to 1305 and we could do it quickly. The S&P 500 was trending down at the close so the opening will be important. Of all the numbers that will be reported over the next two days initial jobless claims is perhaps the most relevant. The consensus is for a number of about 430,000 first time claims anything above 440,000 could be the catalyst to tip the market.

The oil index closed below its recent low of 1301 at 1,299.10. The next support level is 1,295 should we close below 1295 then the next support level would be 1275. The swings in the oil market have been historic in the volatility.

With very little fan fair the yield on the 10-year T-Bond closed today at 3.16 yield the previous near term low was 3.21 so, we broke the recent low of March 16. The next major support is 2.94%. Most people didn't realize that the yield on all short-term Treasuries up to 90-days in maturity this week were yielding zero.

All three markets have seen significant reversals in momentum. Market do tend to over shoot in either direction so, we could see these secondary low hit just on momentum.

If you go back and look at my May 1 blog again, you will see that the notion that the bond market was telling us something different may be coming true sooner than I thought. I’m watching your money.

Dan Perkins

FLASH

2011-05-05T19:40:00.000-04:00

FLASH

If you read my blog from this past Sunday the events over the last few days should not be surprising. The dollar, that know body wanted, soared today with the Euro off almost 3 cents. The European Central bank said that it was not going to increase interest rates in June as was widely expected left traders disappointed.

Crude oil was off just under $10 at $99.99 down from $113.79 on April 28. Gold closed down $43.90 on the day, yes that is $43.90 in one day. Gold if off almost $100 per oz. since last Friday. Silver prices dropped over 12% today. Only two commodities were up for today, wool and lean hogs it was a very significant rout of all the commodities. The yield on the 90-Day T-Bill was 0% and perhaps the most interesting thing of all was that you had to pay the government 50 basis points to buy the 5 year TIPS. The yield is minus 40 basis points

So, did the inflation trade fall off the shelf today? a couple of days doesn’t make a trend, but if we follow through with a downward bias into Friday a lot of people will be very nervous about going into the weekend short anything.

Dan Perkins

Does the Bond Market have Inflation Wrong?

2011-04-30T22:56:00.000-04:00

You arrive from another planet and are told that inflation is a big problem in the United States. You pick up a copy of the New York Times and based upon your reading of the headlines you would believe it to be true. You read the front page and see stories about increasing oil and other commodity prices and the sky rocketing price of gold and the impact of high energy prices on the spending habits of the consumer. You think that inflation is rampant.

On your home planet you learned a great deal about investing in your market from a very early age. Your teachers told you that with increased inflation you have to have higher interest rates. Interest rates have to increase in order to compensate the investor for buying bonds today for the decline in the value of their money caused by inflation.

In looking at the Business section of the paper you go to the US Government Bonds pricing section and you see a chart similar to the one on this page. You look at the return on 90 day T-Bills at 4 basis points per year. You stop and think about how little 4 basis points is in 12 months. You calculate that 4 basis points on $100 is about 4 cents a year. That doesn’t seem like much so you look out 5-years and you earn $1.97 per year for your $100 investment. So, one more time you look out 10-years and you find that you can earn $3.29 a year for every $100 you invest. None of these returns make sense if inflation is truly out of control.

If you look at the yields in the Government market place you would not see any signs of inflation that you read about on the front page of the New York Times or any other newspaper. The big question is, “what is the bond market telling us and is the bond market wrong on inflation?" I think there is another concern that the bond market is telling us. It is more important to investors than inflation. We had a GDP report this week and the government said that the initial estimate for GDP in the first quarter of 2011 was annualized to 1.8%. Now the GDP will go through two more adjustments, but right now most economists think we will stay around the 2% level or perhaps a little less.

What the bond market is screaming that nobody, but perhaps me, is concerned about or is even talking about, is not inflation or deflation, but a new recession in the economy. Notice I didn’t call it a double dip because we have had a recovery albeit tepid it was still a recovery.

I have written in this column in the past that the Federal Reserve is in control of the short-end of the yield curve, but the “Bond Vigilantes” have control of the rate of interest out past a year in maturity. The “Bond Vigilantes” do not seem to be worried about the credit markets at least at the moment. We talk about all the debt we have and how we are spending our childrens and grand childrens wealth to pay the debt. Yet interest rates are falling not only in the United States, but also around the world. The British Bankers Association publishes a daily London Inter Bank Offered Rate (LIBOR). The US Dollar LIBOR interest rate has dropped to its lowest level in the last 14 months, 27 basis points annually for 90-day term.

Back here in the United States we have 90-day T-Bills at 4 basis points, The European Central bank moved their short-term interest rate up this past month, but has indicated that they will not move again until the US increases interest rates. They could be waiting a long time.

I think that much later, perhaps as late as 2013, we will see an increase in interest rates and that is why we own TBT as a hedge against increasing interest rates. Interest rates will go up and down in the interim, but if I’m right and the economy turns negative in the fourth quarter of 2011 to the first quarter of 2012 then the greatest risk in investing now is the American stock market or for that matter any stock market that is driven by growth expectations. If the US economy turns south later this year, then look for the commodity markets to sink under the sheer weight of their unchecked advance.

Wasn't it fun to read this blog? Seriously, they may not all be of good cheer but they are at least my honest opinion. We will see if my crystal ball is any better than others.

Dan Perkins

You have to wonder if Washington is listening to us.Do they really think we are stupid?

2011-04-14T14:16:00.002-04:00

The government cut $38 billion out of this year’s budget and one could ask if they were serious about controlling our debt. You have probably already read about some of the games that were played to come up with the $38 billion. Things like money that wasn’t spent but appropriated in previous years. Then we have money from programs that were being cut because of duplication.

Pew Research Center conducted a poll to find out one-word answers as to how people felt about the budget process. The list to the left shows the one word answers people used to describe how they felt about the most recent budget cuts and the process congress used. This was before we found out on Tuesday, April 12 how they really did it. Scroll down the list and see if you can find a word with which you agree.

The Ipsos/Reuters poll found that 71% of those surveyed opposed increasing the debt limit even though they were told that, "not raising the debt limit would damage the US sovereign debt rating, which is like our credit rating. It would seriously damage our credibility abroad, would make it much more difficult for us to borrow in the future, and would likely push up interest rates." 50 percent of those polled didn’t care. In fact, in a later poll, the number jumps to above 60% that do not want the debt ceiling raised, regardless.

It seems to me that these agreements to cut the budget $38 billion was a drop in the bucket when compared to a $3.8 trillion budget for this year. The $38 billion is equal to just over 1% of the budget. As you read where the money really came from it isn’t much of a budget cut.

I’m sure that you know that the debt ceiling will be reached around May 12. As was pointed out above, over 60% of Americans do not want the budget ceiling raised, in fact they want to start seeing the budget come down.

I recently heard a news clip of Andrea Michel from NBC news interviewing a congressman about the percentage of Americans opposed to increasing the deficit. She asked the question, “How do we educate the American people about why the debt ceiling has to be raised?” Perhaps the American people have already spoken Andrea. They want congress to cut the size of government. I think implied in the question is the belief that the American people are not smart enough to understand why we have to keep raising the debt ceiling.

Americans have come through a very difficult time since the financial meltdown of 2008. Their actions speak volumes as to what Federal, State and local governments must start doing to get their financial houses in order. If we get to May 12 and the congress has failed to make a commitment to seriously reduce the deficit we may well go into default and I suspect we may see recall elections all over the country this fall if the debt ceiling is raised. The congressmen, and women, and Senators won’t have to worry about the 2012 elections, they will have to deal with massive recalls in 2011.

Dan Perkins1.

Flash --S&P 500 hits support and bounces off but is it a dead cat bounce?

2011-03-14T18:07:00.001-04:00

FLASH

As you can see from the chart above we hit significant support of 1286 on the S&P 500 today and bounced off of that target. We closed the day at 1296-- the question is if we go back and test 1286 again will it hold? If it doesn't hold then 1272 is the next support and then movement to 1250 is possible.

The market has come a long way without a significant correction of 10% or more. As indicated in previous blogs I though the market was looking tired. It was looking tired before we had the problems in Japan.

Dan Perkins

This is the Place Between A Rock and A hard place

2011-02-28T17:18:00.000-05:00

People are beginning to ask the question, how did Wisconsin and 42 other states find themselves in such serious financial difficulty? In many cases, as I said in the last blog, the states made promises they couldn’t keep.

Everything starts out with an assumption and if your assumption is wrong and you don’t change it you get deeper and deeper in a hole. The actuaries in the United Kingdom made the assumption that most males under the public pension would die by 76 and females by 82. There was no room in their assumptions for the fact that thousands if not hundreds of thousands of men and women would live past 100. The increased longevity has drained the public funds and now they are looking for ways to solve the problem.

As you can see from the chart at the top of this article the median return for pension funds is 3.42% for the last 10 years. Now compare this to the assumed return that the state pension funds have used for the last 10 years of 8% per year. Benefits are paid in dollars not percentage points. Let’s look at the numbers. We will use $100,000,000 for our example. If over 10 years you actually earned 3.42% then in 10 years on a compounded return you would have $103,112,223. If you were supposed to earn 8% for the same 10-years you expected to have $199,900,463. The shortfall amount between what you actually earned and what you projected you would earn was, in our example, $98,788.240.

In Sunday’s New York Times magazine supplement an interview with New Jersey Governor Chris Christie revealed the investment performance problem for New Jersey. It had an assumed rate of return of 8.25% and for the last 10 years it has actually earned 2.6%. One of the other parts of the problem is that for 17 years the State of New Jersey, and in some cases the local governments, have failed to make their full contribution to the pension plan. Between 2006 and 2009 under the then governor John Corzine 49% of the mandatory increases went to salary and benefit for employees. The auditors now feel that based on the current level of benefits the plan is $100 billion under funded. Richard Keevey who was budget director for both a Democrat and Republican governor said. “You couldn’t tax your way out of this problem.” When you told your retirees that you would pay them based on what you expected to earn, you sell bonds in the market to make the current payments then you have to make the interest payments on the bonds and continue to make the level of payments to the retirees and in some case to increase the payments based on the CPI.

Another issue that is not being discussed is that most people think that the state funds should reduce their expected return to something more close to what they have actually earned. If they did that over the last 10 years the amount of money that would have to be added to the fund would be astronomical. My guess would be that it would take most of the state revenue to fund the pensions. Now do you understand why nobody wants to talk about the real problem of public pensions and retirement health care? Some governors realize the problem and are looking for the employees to start paying more for their pensions and retirement heath care. The money that will be necessary to fund the shortfall will have to come from both the employee and the local and state governments. If you need 8% in return and you are only earning 3.42%, you are in trouble. The longer you wait to address the problem the faster it grows. We are far from solving this problem any time soon. I’m very concerned that if we don’t get this problem under control the stock markets will be in serious trouble.

Dan Perkins

Did Lincoln in the 1850’s pave the way for Wisconsin today?

2011-02-21T14:37:00.000-05:00

I believe we may be at a major inflection point that is so important that the outcome could go down in American history as more important than World War II. The newly elected governor of the State of Wisconsin took his election mandate to do something about the out of control budget in his state. The current projection is that unless something is done the state will have about a $150 million deficit this year and then ballooning to over $3 billion next year.

He wants to cut entitlements including retirement benefits and health-care for all public employees in the state and reduce retirement benefits for those former employees already in retirement, among other things. In order to try to prevent this from happening the Democrats in the state legislature, as they say “left the building” leaving the remaining Republicans without a quorum.

When Lincoln was elected along with 8 other friends to the Illinois State Legislature they were called the “Long 9.” They got this nickname for the fact that all of them were over 6 feet tall. The house meeting room was on the first floor of the building and if they didn’t like what was going on they just jumped out of the widow and there was no longer a quorum.

The state Senators in Wisconsin didn’t jump out of the window but they did leave the building so there was no longer a quorum to deal with the budget issue. If you have seen the stories in the paper or on TV you see state employees in the rotunda protesting the cuts in benefits and the collective bargaining process. If the elected officials in Wisconsin face down the problem in their state I believe the effect will be like falling domino's across the country. Elected officials in other states which have budget problems, at least 43, will have to pay attention. Should the officials in Wisconsin fail to act then I would suspect that elected officials in other states will “Chicken Out” and not deal with the problems of not having the money to pay for the benefits.

Lincoln’s home state of Illinois has a serious budget problem and they increased income taxes 65%, raised taxes on corporations and now they say that less than 30 days after increasing tax and not cutting budgets they will have a $15 billion deficit this year. Now what? If the states can’t get their houses in order how can the US Congress get our Federal government in order?

I have written to you in the past that I’m very concerned about the municipal bond market. If Wisconsin can’t deal with the problem then why would the other 43 states want to try to deal with it. If Wisconsin walks away then our economy and both the bond and stocks markets are in serious, very serious, trouble.

I understand that many of the employees are saying, “But you promised…,” well GM made a promise to their employees and so did Chrysler and many other companies that had pension plans. They just made bad assumptions. The promise was changed to reflect the reality of what is going on today. When you borrow money to buy a house you sign a contract that you promise to pay the loan back. But, if you lose your job you can’t keep the promise because you have no income. The states just don’t have the money and they will find it more and more difficult to borrow money to pay today’s expenses. Very soon we will find out whether we will be acting responsibly or acting like the Wisconsin Senators who left the building or Lincoln and the “Long 9” who jumped out of the windows to avoid the problems.

I do not think the financial press is spending enough time telling Americans just how serious this problem is and what it can mean to all of us. In America, change has to start at home and as we work to get our households in financial order we move up the line to our school boards, our cities, our states and finally the federal government.

Let us hope that the leaders in Wisconsin make the right decision as it has the potential to affect all of us.

Dan Perkins

Fallacy #1

2011-02-10T13:57:00.000-05:00

Fallacy #1, the bond traders control the long-end of the maturity curve while the Fed controls the short-end of the curve because it sets short-term interest rates is very stable. I believe that as a percentage of price the short-end of the yield curve is more volatile than the long-end and the chart below shows the yield changes of the 90-Day T-Bill for the 12 months ending 2/10/2011.

So those who doubt the swings in the yields of 90-Day T-Bills may want to look at the second chart which shows the volatility of the 90-Day Bill vs, the 2 year T-note. The white line on the chart is the 90-Day Bill and the yellow line on the bottom is the 2-year note. Again you see the volatility of the three month bill. One thing to see in the chart is the calamitous decline during he flash crash of the stock market in May when the bill plummeted and traded at a negative return. I'm working on he 30 chart and as soon as I get it I will forward it to you.

Dan Perkins

Source Bloomberg

Flash Repot on housing

2011-02-09T10:59:00.000-05:00

FLASH

The number of borrowers who owe more on their mortgages than their homes are worth, called negative equity, took a huge leap in the fourth quarter of 2010. A full 27 percent, over 1 in 4 mortgages of borrowers are now “underwater” on their mortgages, up from 23 percent in the previous quarter, according to a new report from Zillow. They believe that the foreclosure moratoriums and falling home prices are to blame.

Adding to a slew of negative reports on home prices, Zillow found home values posted their largest quarter-over-quarter decline, 2.6 percent, since the beginning of 2009. Home prices plunged 5.9 percent compared to the fourth quarter of 2009.

Florida, California and Arizona that suffered most from the sub-prime mortgage collapse continue to post high negative equity rates, other less likely candidates are climbing. Over one third of Chicago borrowers owe more than their homes are worth, and in Atlanta over half are underwater. Denver and Minneapolis are also well over the national rate.

It is hard for me to believe that the Fed will increase interest rates until jobs expand and the housing market at least stabilizes. We will have to wait and see the impact of the lifting of the foreclosure moratoriums will have on both supply and prices before we can look for a bottom in the real estate market.

Dan Perkins

Something Got to Give

2011-02-06T18:07:00.001-05:00

I watch interest rates continue to increase and the stock market indexes continue to rise. I do not believe that both can go up forever. As the old saying goes, “Something's got to give.” If I were a betting man I would say the stock markets would be the first to flinch and break. My problem is that I don’t know when this will happen. I have no doubt that it will but when is the issue.

I was looking for a way to show you what has happened to the stock market and the bond market since the Fed said that it will have round two of quantitative easing. You do need to know how to read the chart above. The top line in Red, not my choice of color to show positive returns, is the upward movement of the S&P 500. The bottom line in black, which should be red, is an indicator of the price of the 30-year T-Bond,

The interesting thing is that if prices rise then yields fall. What is important about this chart is how the divergence has widened over the time period without any significant correction in either market. When we had a small correction in the stock market in December there was no corresponding rally in bond prices.

As you can tell by looking at the chart the stock market is up about 15% and the bond market is off about 9%. Now let’s put both of these moves in historical context. The average return over the last 100 years in the S&P is about 8%. Over the same period of time the average return on the bond is about 5%.

The current yield on the 30-year T-Bond is a touch under 4.75% or just over one quarter of one percent away from its historical average. The stock market on the other hand is almost 90% above the historical average. As the yield on the 30-year gets closer to 5% money will move out of either cash or stocks into bonds.

Going back to our historical numbers again, if the stock market is going to grow by 8% on average and the bond market was yielding 3.75% you might want to put more money in stocks as they may have more opportunity than bonds. If, on the other hand, the yield on the 30-year T-Bond hits 5% or even close to 5% then look for the market to run out of steam. This past week I saw an article about some money managers encouraging the Treasury to issue a 100-year bond. As long-term interest rates continue to rise look for more talk about offering bonds with maturities greater than 30 years.

As I said, I don’t know when the correction will happen but the stock market looks tired to me. It has to labor every day for smaller and smaller gains. So the correction, when it comes, may not be a quick sell off, but a small grind down. People who have gains will be reluctant to sell expecting the bounce off the short-term low. We could have a situation where the market grinds down slowly and then we have a blow off that take us down very quickly.

The greatest risk at the moment is emotional risk. The fear of not being in the market as it goes up sometimes causes investors to jump in to buy more than they would under normal circumstances. This time around buying the dips may be the wrong decision.

Dan Perkins

Things are changing

2011-01-27T16:53:00.000-05:00

FLASH

Gold Has a Sinking Spell Gold prices today are down to $1,310 nearly $100 in less than a month’s time, after gaining about 30% versus the dollar in 2010.

T-Bill rates fall the most in a month

Rates on U.S. one- and three-month bills fell the most in a month after the Treasury Department said it will reduce borrowing on behalf of the as the U.S. approaches a debt-borrowing limit.

Crude oil down to lowest level in a month.

The spread between Brent North Sea is now almost $12 and crude is down another 2% today

New Claims Up unexpectedly by 51,000 above consensus.

Are these the corrections people were hoping for but didn't really want? Can a stock market corrections be far behind?

Dan Perkins

What clients told me is important

2011-01-20T21:40:00.000-05:00

Each year in January I try to meet with as many of my clients in person as I can. We talk about the previous years performance, what my expectations are for the coming year and what changes I might want to make in their portfolios. I also spend time asking them what are they concerned about for the next 12 months and longer.

I have to say that I was very surprised by the comments I heard this year especially after the mid term election results. I found two themes were repeated more than any others in these discussions; the level of government spending and the amount of debt at both the Federal and state level.

Clients who owned municipal bonds were worried about the interest payments and if they would receive their money back when the bonds were due. A look at the chart below -- it shows why they are and you should be concerned. Look at what has happened to the total return on the national index line of tax-free bonds and California and New York long-term bonds. What the picture shows is that there is very little confidence in the muni marketplace.

In a recent article in the New York Times covering the problems in the State of Illinois, it reported that the state was over $13 billion in the red. The article went on further to say that the State needed to borrow $3.7 billion to make the retirement fund payments so there was sufficient money to make payments to the beneficiaries. In the deep recesses of my mind I remembered that Illinois had come to the bond market twice before with pension bonds to shore up the shortfall.

I did some research on my own and found that with the most recent $3.7 billion in pension bonds the state had issued over $30 billion in pension bonds to help fix the fund in the last 10 years. The Times article went on to say that Illinois had the lowest pension-funding ratio in the nation. It suggested that the state had only funded about 65% of its liabilities.

Many states have serious funding issues and growing deficits because expenses are exceeding income and have for some time. S&P just reported that they believe that the amount of unfunded post employment liabilities at the state and local level is in excess of 2 trillion dollars. We found out through our new governor in New Jersey that a number of local governments had not been making payments on behalf of their employees to the state retirement fund. They were living off the assumption that the state pension funds would earn 8% and cover their shortfall and unfunded liabilities.

The big problem with using an 8% assumed return for pension assets is that the S&P 500 has had an average rate of return over the last 10 years of negative returns. So how valid is the 8% assumption?

If the plan sponsor, the state, were to adjust downward the assumed return on the pension assets reflecting as PIMCO says is the new normal, then the contributions from the governments to fund the pension liabilities would have to rise significantly. The reason is that the lower rate of return the greater the amount of money that has to be invested to produce enough to make the pension payment to the beneficiaries. The states don’t have the money to make the current payments let alone increasing the amount of the contribution driven by a reduction in the assumed rate of return.

In my first blog of the year I suggested some of the things that could adversely affect the markets this year, one was the problem in the municipal bond market. I think the chart above shows why I have concerns. I truly believe that with unemployment at just under 10% and the housing market going nowhere we are sitting on a time bomb. Illinois answer was to hold spending at the 2010 level which was already at a deficit, increase personal income taxes by 65% and raise taxes on corporations. I truly believe that the public sector retirement system and other state budgets have to change. I realize that many people will be hurt, but unless we bite the bullet now millions of Americans besides state employees will be adversely affected.

If you think that muni bonds looks attractive then take another look at the chart and see what the capital markets are saying about the desirability of owning tax-free bonds.

Dan Perkins

Some things to think about for 2011.

2011-01-02T19:46:00.002-05:00

Energy

The price of gasoline at the pump may have the biggest impact on the growth prospects for the economy in 2011. On Monday 12/27/10 the U.S. Department of Energy (DOE) reported that both diesel and gas prices climbed to the highest point in more than 2 years during the prior week. The national average price for regular gasoline increased 7 cents (2.3%) to $3.052 per gallon and diesel increased 4.6 cents (1.4%) to $3.294 per gallon. Crude oil closed Monday at $91 per barrel up $2.19 (2.5%) since last Monday. As the price of gas continues to rise, every 1-cent increase in the price of gasoline decreases the U.S. consumer disposable income by about $600 million per year. Over the last 12 months the price of regular gas has increased from $1.75 to $3.02 a gallon and in turn has taken over $76 billion out of consumers pockets.

At the peak of crude oil prices in the spring of 2008 the national average for the price of gas was over $4.25 a gallon. If the global economies continue to recover then I would expect world wide demand for oil to increase and in turn the price of gasoline to continue to rise. I believe we can break the previous high in gas prices without going to a new high for crude oil. Keep in mind that the administration wants to add 15 cents per gallon to fund green energy projects. That increase alone, should it go through, would drain an additional $1 billion from the wallets of Americans.

Stock and Bond Markets

The market is at levels that I feel are unsustainable in the near term and therefore I think we are heading for a serious correction. For 26 weeks this year investors were taking money out of stock mutual funds and switching to bond mutual funds. Then when bond prices began to fall investors took money out of bonds and went into stocks at close to the near-term high in the stock market. The stock market continued to rise in the face of rising long-term interest rates. Interest rates and stocks cannot go higher at the same time. One will have to break. I think a decline in stock prices may bring about a short-term rally in bond prices again causing investors to make the switch back to bonds.

I would expect that the stock markets might well end up 2011 at or near the level at which they closed at the end of 2010. The road to get to he end of 2011 may be full of significant declines that dash hopes and monster rallies that raise hopes. By the end of 2011 investors will be depleted of energy, and in some cases their money.

Conflict between the Congress and the administration will not help with the decision making process for the leaders in the private sector, including small business people. All the clarity that many people hoped and believed would come about because of the November election may not materialize. Uncertainty will continue about taxes, health-care, budgets, and the national debt. All of this uncertainty will spill over into the currency, commodity and stock and bond markets.

Municipal Bonds may be the story driving markets in 2011

The problems of state and local unfunded liabilities for retirement health care and pensions will take center stage and I think will be in the headlines daily during the first quarter of 2011. The same companies, Moody’s and S&P, who told us the sub-prime mortgages were not a problem are telling us the municipal markets are fine. They do not see any significant defaults or bankruptcies in 2011. I wish I were as confident as they are.

I see what many people are saying is a trillion dollar problem not going away. I know that many people feel that the Federal Government will bail out the states but I don’t see where we can get the trillion dollars or more to solve the problems. We have two problems, the unfunded liabilities and the current out of control budgets.

Other nations around the world are dealing with the same problems of massive deficits and are having to make some serious decisions about how people will be hired and paid and what type of retirement benefits they will receive. That debate is coming to the shores of America and this will be the most influential item in 2011.

Getting paid while you wait may be the only hope to make money in 2011.

Dan Perkins

Just how important are dividends?

2010-12-07T10:56:00.000-05:00

FLASH

For many years I have been telling clients and prospects that I want to be paid while I wait so that dividends and interest help reduce volatility. In the Fed Chairman interview last Sunday he said that it could take perhaps up to 5 years to work our way out of this problem. He pointed out that we need the economy to grow by 2.5% just to keep the unemployment at its current level. For those readers who are my client’s you know how dividends protected your income and were the basis for the price recovery. I ran across the following quotes yesterday and I think it makes my point about the importance of dividends and interest.

BlackRock’s Richard Turnill and Stuart Reeve, who head the global equity team for the world’s largest money manager said that “Some may be surprised to learn that 90 percent of U.S. equity returns over the last century have been delivered by dividends and dividend growth,” In a report to their clients they are advocating investment in dividend stocks. Congress is reportedly close to a bipartisan agreement on the Bush tax cuts, including the dividend tax. The agreement would extend them for all income brackets for at least 2 years. President Obama said in a press conference that he doesn’t want taxes to go up next year for “ordinary Americans.”

The potential compromise couldn’t come at a more crucial time for stock investors. The total return for equities is determined by price appreciation and dividend income. Following a decade of zero total price appreciation and a rejection in the boardrooms of dividends as an effective allocation of capital, the BlackRock strategists say the time is right. They cited the low-yielding investment alternatives out there, an aging baby boomer population that will crave that dividend income, and an economic outlook for slow growth.

Dan Perkins

Deflation or Inflation: Energy is the key

2010-11-23T21:42:00.001-05:00

The price of energy is the key to what the future holds for inflation or as some writers want to say disinflation. The charts above show what has happened to the price of crude oil and natural gas since their peaks of 2008. As you can see the recovery in crude oil has been much better than the recovery or lack there of in natural gas. The latest report from the Department of Energy shows that we are now importing 63% of all the crude oil used in the United States. Because we do not produce enough we have to buy from countries that may or may not be our friend. The price of crude is a function of supply and demand; we demand it and other nations supply it at their price.

As you can see from the chart above, the high in the price of crude oil in the Spring of 2008 when it was about $157 a barrel. As of this blog it was around $81 which is up from the low of $46 in February of 2009. We are up about 100% from the bottom and still down about 50% from the top.

Natural gas is a different story. The most recent high in natural gas futures was during the summer of 2008 at around $56 and hit its low on November 2, 2010 at $3.83 and currently is around $4.13. Why has the price of natural gas not kept up with the recovery in crude oil? The answer is simple, supply and demand. We have a vast supply of natural gas and we are finding more every day. The inventory is growing faster than we are using natural gas.

I believe there is a significant long-term investment opportunity in natural gas both in the ground and in the transportation of it. There is an energy efficiency factor that tells how much natural gas is necessary to produce the same amount of energy as a barrel of crude oil. Right now, based on the current price of natural gas, you would have to spend $22 on natural gas to produce the same amount of energy as an $81 barrel of crude oil. Using natural gas in the production of electricity is cheaper than coal, or nuclear power.

Could legislation before the lame duck session of Congress change the demand side of the equation? According to T. Boon Pickens a bill is before Congress that would provide tax incentives to switch to natural gas for trucks and transportation equipment and encourage natural gas as a replacement for crude oil. In many big cities in America you will see signs on buses that say, “running on clean burning natural gas fuel.” You may have read that GE will be purchasing 1,200 Chevy Volts as company cars. Peterbuilt, the big truck building company says they are ready to make the changeover to natural gas powered trucks. In fact, they have an order for 120 alternative energy trucks.

If natural gas is going to become an important source of clean energy in the future, in turn increasing demand for natural gas, how do we make money?

My clients already own natural gas in the ground through the investment in natural gas royalty trusts. We own the reserves and as the price of natural gas increases our income will increase. The second way to participate is through natural gas pipeline companies. Again, my clients already have positions in some of the pipeline companies that are master limited partnerships. In both cases, the natural gas in the ground or the pipelines, we are earning dividends in the 6% to 7% range and as the price of natural gas increases our income will increase. I will be adding to these positions as I see opportunities in the market.

I do not know if the low in natural gas prices in early November was the bottom or not, I do know that 6% to 7% yield at these levels is very attractive and there is not a lot of downside risk. If you do not have Master Limited Partnerships or Royalty Trusts in your portfolio you need to take a closer look at them.

I want to wish you and your families a Happy Thanksgiving and to make time for family.

Dan Perkins

History doesn’t make mistakes; people do by not remembering the past.

2010-11-03T18:38:00.000-04:00

In the Saturday, October 30, 2010 edition of the New York Times there was an article titled, “US Hears Echo of Japan’s Woes,” by Martin Fackler and Steve Lohr. The subtitle for the article was “The Great Deflation, Studying Past Blunders." The initial focus in the article was Hiroshi Kato who now is the President of Kaetsu University in Tokyo. In 1997 he was head of the government advisory committee that blundered in deciding that his country's economy had recovered enough that it could withstand an increase in taxes and continue to grow. He and his committee recommended an increase in the national consumption tax from 3% to 5%. This hike in taxes lead to an unprecedented period of no growth and deflation that still is affecting Japan today, thirteen years later.

In the article Mr. Kato says, “Our sins are large.” He goes on to say, “I hope the rest of the world can learn from this mistake.” Many times over the last few years I have been telling my clients and readers that I felt that the recovery in the United States when it came would look like the recovery in Japan. The Japanese central bank has had interest rates close to zero for almost 10 years. We have seen interest rates near zero for 2 years in the United States what if we have 8 more years at near zero interest rates and an under performing economy, with very high unemployment?

I don’t know what will happen in the lame duck session of Congress, but I hope they take seriously the words of the man who is credited with leading the biggest economic blunder in Japanese history about raising taxes. The mid-term election is only part of the history making process that our leaders will be facing over the next 6 to 12 months. The lines have been drawn over more government, more debt and higher taxes vs. the concept of smaller government, lower taxes and debt reduction.

The concern I have at both the federal and state levels is how you say to people we will have to cut your health care, your retirement benefits and reduce services in order to bring spending under control. The private sector has had to make these same decisions which affected millions of people. Will our government leaders have the courage to truly think about our children and grand children?

Dan Perkins

It is time to talk about expectations.

2010-10-28T13:18:00.000-04:00

As we approach the mid term election next week I think it is time to talk about expectation for returns going forward. The day after the election the Chairman of the Federal Reserve will be meeting with the members of the Open Market committee to discuss QE2, not the boat, but Quantitative Easing Part 2 of monetary policy. The president, on the other hand, is leaving for Pakistan two days after the election. My guess is that it is better to be out of the country when you know what will hit the fan on Tuesday.

The Fed is concerned that the economy, jobs and the price of housing are not moving fast enough in the upward direction. The Fed is thinking about spending more money to buy longer date Treasury bonds in hopes of driving interest rates down. They already have the short end of the yield curve close to zero and they feel that if they can bring down longer term interest rates they can spur the economy. Part of the logic is that lower interest rates will force people to buy stocks, houses and inspire companies to hire more people and therefore, in turn, make the economy grow. People who need fixed income investments to supplement their social security and pension will find their total income decline. With interest rates low at the short end of the yield curve people were forced to go out further on the duration curve to try and get yield. If the Fed is successful, through its purchases, in driving longer-term interest rates down then people will find their income dropping even further.

As one client pointed out to me recently, the money I have for him in growth mutual funds has gone up and of course has gone down, but in the interim they have not paid a lot in dividends. He said to me “I guess I’m not getting paid enough to take the risk in common stock.” We spent some time talking about what are reasonable expectations for returns going forward.

Before I talk about future expected returns I want to apprise you of two things that could happen in the next 30 days that could have significant impact on future investments. The trustees of the Social Security Trust fund have given indications that there will be no cost of living adjustment for beneficiaries in 2011. That would mean that beneficiaries will have had no adjustment for the last 2 years. Secondly, the Presidential Commission on Tax Policy which is charged with reducing the deficit is due to release it’s report with recommendations to the President by December 1, 2010. The commission has sent up three trial balloons.

The first is the elimination of the mortgage interest tax deduction. This elimination would grandfather existing mortgages but going forward all new mortgages would lose the interest deduction. Our children would not be able to buy a house and deduct the interest on the loan, which would make the expense of owning a home more of a drain on household income. I could do a whole blog on this issue and just may if it comes to be. The second deduction they propose to eliminate is the personal exemption for children. As grandparents we don’t take that deduction but as the children were growing up the tax benefit helped to offset the significant cost to raise a child. Again the impact would be to put a further drain on household income to pay the expenses and not be able to claim any of the money spent as a personal exemption. If you don’t own a home and have a mortgage you are safe with the first two items, but nobody, and I mean nobody, would escape the third test balloon; that of the VAT (value added tax). Everything we buy would have an additional tax all the way through the building and distribution process to you the consumer. A VAT, in my mind, is a progressive tax in that once it is in place the Congress can increase the percentage without asking us. If any of these three items are enacted then more money will be spent in direct and indirect taxes and all of us will have less to spend.

In the past I have told clients that I expect, over a 5-year period of time, to earn between 6% and 8% after fees and expenses. Based on what I see at the moment I have to ratchet down the expected returns to 4% to 6% return. Public and private pension funds will have to reduce their expected returns from 8% perhaps to 6% or less. Lower expected returns will strain the balance sheets and I see the only possibilities are reduction of existing benefits and retirees paying a larger share of post retirement healthcare. PIMCO the largest bond manager in the world has created a new phrase called the, “New Normal”. They believe “New Normal” will be lower growth, higher unemployment and low inflation.

I have said many times before in this Blog that I believe we are in for a Japanese type of recovery much like what PIMCO is projecting. If we are correct then return expectations have to come down. The real question is how low is low enough?

Dan Perkins

Just when you thought the all clear had been sounded--doubt creeps back into the banking system.

2010-10-17T15:01:00.000-04:00

The bond markets are telling us that they are concerned about the problems with foreclosures. All of the major bank stocks have taken a hit over the last few days. Just one example of the decline is Bank of America. On October 5th the stock was priced at $13.56 a share. As of October 15 the share price is down to a low of $11.74 for a decline of $1.82. The percentage decline is just under 13% in 10 days. A recent article stated that Bank of America might have to buy back $70 billion in foreclosed mortgage loans.

The problem in the foreclosure market place is, in simple terms, fraudulent foreclosure documents. I saw an article that shows three different signatures on various foreclosure documents and perhaps none was the signature of the real borrower. So, as Ronald Reagan once said, “there you go again.” The mortgage and housing problems are still significant trouble in our financial system.

Doubt will start creeping back into the banking system if it hasn’t already and bankers will be asking themselves, “Do I want to deal with this bank when I don’t know their exposure to the foreclosure problem”? The chief financial officers of both public and private corporations will again be asking the same question about their money on deposit at banks.

There are risks in keeping large sums of money in the bank. Regardless of the amount of money you have in a bank the maximum FDIC insurance on deposits is $250,000 per tax ID number per institution (bank). If you have more than $250,000 on deposit, regardless of the type of the account, the amount in excess of that $250,000 makes you a general creditor of the bank. As a general creditor you have no real way of knowing what the bank is doing with your money. In the accounts I manage for my clients I have no more than $250,000 in all accounts per tax ID number on deposit at any one bank. I do not need to take the risk.

So how bad is the foreclosure problem? If the banks are forced to stop all foreclosure proceedings until the regulators can figure what to do about the problem it could take to well into 2011 before we see some resolution and the housing market will shrink dramatically. As more and more information starts to come out I will watch several indicators that you can watch with me. Please keep in mind that a house that is in foreclosure in Florida may have a mortgage owned by an investor in Europe or the Far East so this problem may have international implications.

What to watch:

The yield on the 10 year T-Bond

The yield on 30-day and 90-day LIBOR

The PJB which is an ETF of the major banks

If the credit markets fear another major problem with foreclosures it will show up in these three areas. I do not think we can get out of the foreclosure problem regardless of the forged documents, until we get millions of people back to work.

The election in two weeks is about jobs and only jobs. If you don’t have a job nothing else matters.

Dan Perkins

30 Days to Change?

2010-10-01T20:30:00.000-04:00

One month from Tuesday you will be going to the polls to what some have called the most significant midterm election in recent history. Since I will be in Florida I have already voted.

If the Republicans gain control of the house they might be able to stymie the rest of the plans of the Obama administration and the liberal Democrats. There are suggestions that perhaps a Republican majority in the house might try to repeal some of the passed legislation.

Based on recent polls it appears that the Republicans may have a chance at taking control of the House. I saw a projection today from Dick Morris. He is saying that he thinks the Democrats will lose 100 seats in November. Prior to today the highest prediction I saw was 75 seats. I think the most difficult thing to predict is how mad the electorate is. If they go into the voting booth in November really mad then it could be a blood bath for Democrats and some Republicans. One thing that could keep them mad is the jobs number next week. If the unemployment rate inches closer to 10% a greater number of people will react to a bad number. On the other hand should the number be a surprise to the downside perhaps some of the steam will come out of the tea pot. So, people have been saying that the government has postponed the jobs number because it is a bad number I'm not a believer that the administration is playing with the jobs number.

If the Republicans do gain the majority then the leadership will change in the House. We could have a split Congress and I believe the tension between the two parties will be ramped up looking forward to the Presidential election in 2012.

While I can’t call the outcome of the election I can give you my best guess about what I think would happen in the markets with different outcomes. Then I will give you a twist that perhaps you have not thought about.

Scenario # 1 The Republicans gain control of the House and the Democrats retain the control of the Senate.

I think the S&P 500 would rally by as much as 100 points within a 3-week period of the election; in essence a Santa Clause year-end rally. Once the euphoria wore off I would expect the markets to focus on the tax bill, how much more all of us would pay, and the problems of jobs and housing.

Scenario # 2 The Republicans gain control of both the House and Senate.

I think the market would rally initially by 100 points, take a breather, and go up almost 150 points by year-end. The Republican control of both houses would create the feeling that the newly elected have a mandate to fix the problems and undo what has been done. I think it might well be like the time when Reagan took over from Carter and the whole tone of the country changed for the positive. We would still have problems, but we should have the resolve to fix the problems. The Bush tax cuts would be made permanent.

Scenario # 3 The Republicans get control of the House and the Democrats retain control of the Senate by one vote.

In his 19 months in office President Obama has issued 64 executive orders. By contrast, in the eight years George W Bush was in office he only issued a total of 279 executive orders. We know that the president issued an executive order to halt deep water drilling in the Gulf of Mexico and even though the court over turned the ban the administration will not lift the ban.

What if the President decides that congress can’t function, i.e. give him what he wants towards his agenda? Is it possible that for the first time in the history of the United States the executive branch of the government takes over the responsibility of the legislative branch (Congress) and uses the executive order power to get what it wants?

Is he willing to become a one term president to make the changes he wants regardless of the Congress or the wants of the people? With two years to go in his first term would the new Congress (Democrats) want to support impeachment proceedings against him for his flagrant violation of the Constitution because they see him as unelectable in 2012?

I realize that this last Scenario may seem a bit off the wall but as they say “Politics makes for strange bedfellows.” The last two months of 2010 could be very volatile in both the markets and the emotions in the country.

What if there is a Scenario #4 The Democrats retain both houses?

If that were to happen look for the market to sell off big time and we would have to look at a whole new approach to how we are investing money. If that were to happen I would expect another flash crash in the equity markets, but no quick recovery. The dollar would come under tremendous selling pressure and we could see September 2008 all over again but with one major difference; there aren’t many bullets left in the arsenal of the Fed. We could be in for serious panic. I saw what happened in October of 1987 and September 2008, and I think if Scenario #4 were to play out then November of 2010 could be very scary.

You are asking yourself how could this happen? There are two reasons; jobs and housing. The unemployment rate is close to 10% and people may be so scared that they vote to keep the Democrats in control because they are scared about what the Republicans might do to their unemployment and health care benefits. Fear is a powerful motivating force.

I hope I’m wrong. However, if I’m right, you’ll know were you heard it first.

Dan Perkins
Don’t forget to exercise your responsibility to vote

Stocks Stuck in 15 to 25 year ranges

2010-09-09T19:59:00.001-04:00

Interest rates may be stuck but so may stocks

On many occasions I have said that I felt that the Federal Reserve was on hold till at least 2013. Recently I came across some research that suggests that stocks may be in a similar holding period.

The periods of flat returns can run as long as 15 to 25 years. We started our correction in 1999 with the Dot Com bubble burst. If we take that shorter view of 15 years then we are 11 years into the holding period.The chart to the left shows what has happened when we have had many years of flat returns on common stock. As the text to the left shows, these periods can run to as much as 25 years. These periods are not without opportunity but timing has to be perfect to trade for profits.

Just about the time I think the Fed might start increasing interest rates might be the time to buy stocks. That is not to say that opportunity does not exist to make money in stocks. You will just have to be quicker about your buy and sell decisions.

We have talked in the past that the last 10 years has been the lost decade for common stocks as measured by the S&P 500. The average annual return for the last 10 years on the S&P500 is minus 2.9%. If we are in store for a minimum of 4 more years of stocks being stuck then dividends are very important. If the investment capital is going nowhere in terms of price then the dividends have to carry the load.

Being paid while you wait will be an important strategy.

Dan Perkins

The Yield Curve is Steepening.

2010-09-03T09:30:00.001-04:00

I warned in a previous blog that people who were extending their maturities in order to get a higher yield may be in store for some loss of principal as interest rates rebound. I used the rebound instead of rise for a specific reason. The yield on the 10-year T-Bond has come down dramatically, at one point the yield was 2.42% intraday. As of this publishing the yield on the 10-year is now 2.70% or up 30 basis points from its most recent low. Some forecasters think we could go back to 3% yield on the 10-year.

Recently I published a note from Merrill Lynch that was projecting the yield on the 10-year at year end to be around 2.5% which was lowered from their previous target of 3.25%. The Investment Company Institute (ICI) reports that for the year a significantly greater amount of money is flowing into bond funds vs. common stock funds.

As people have moved out of low yielding cash money market mutual funds and into bonds they are taking more credit and duration risk with their money. The credit risk is not knowing for sure that the company issuing the IOU will be able to make the interest and principal payment. The duration risk is the longer term you invest your money the more it can fluctuate on a day-to-day basis with market conditions. If you had to sell you may or may not get what you paid for the investment.

I still believe that we will be in a Japan-type of recovery until we can make significant improvement in the jobs area. High unemployment and depressed housing will keep the breaks on the US economy for years to come. Interest rates will fluctuate but I still think the bias is for rates to continue to fall. The declines in interest rates will be slow and somewhat volatile,

While longer term interest rates are moving higher, shorter-term interest rates are falling again. Over the last three months 90-day LIBOR has declines from 54 basis points to 29 basis points. The downward movement in 30-day LIBOR is less dramatic but 30-day LIBOR interest rates have fallen from 35 basis points to 29 basis points.

On the Treasury side 90-day T-Bills have fallen from 19 basis points to 12 basis points over the same period. So, we have a steeping of the yield curve in that short interest rates are falling while long-term interest rates are rising. I have been thinking again and some may say, don’t hurt yourself. I have been thinking about the sacred prime interest rate. The prime rate is the benchmark for many different financial products, like credit cards, mortgages and business loans. The prime rate has not moved in almost 2 years so what would have to happen to break the back on the prime rate?

People have different opinions on the outlook for the economy and some feel that the Fed will be forced into some type of Quantitative Easing later this year after the election. It would not surprise me that the new office of Consumer Protection starts talking up a reduction in the prime rate. Remember you heard it hear first, the idea that deleveraging of the balance sheet of the consumer and small business need to get the same interest rate benefit of big business, that of a lower cost of funds.

Dan Perkins

FLASH

2010-08-24T10:41:00.000-04:00

Really Bad Number

Released on 8/24/2010 10:00:00 AM For Jul, 2010
Consensus Consensus Range Actual
Existing Home Sales - Level - SAAR 4.650 M 3.960 M to 5.200 M 3.83 M
Existing Home Sales - M/M Change -27.2 %
Existing Home Sales - Yr/Yr Change -25.5 %

Highlights
It doesn't get worse than this. Existing home sales fell 27.2 percent in July to a 3.83 million annual rate for the lowest level in 15 years. The 3.83 million rate compares with expectations for 4.65 million. Supply at the current sales rate ballooned from June's already swollen 8.9 months to 12.5 months for the worst reading in 11 years.

Yet prices showed little effect, down only 0.2 percent to a median $182,600 and reflecting relative strength for higher priced homes. The year-on-year median price edged lower but was still positive at 0.7 percent. Yet "was" is the word to note as extremely heavy supply, together with heavy foreclosures and distressed sales, point squarely at price pressures ahead.

There's nothing to explain away July's collapse. Single-family and condo sales show nearly the same deterioration. Regional data show no substantial variation. Stocks are moving lower and money is moving to safety in immediate reaction to this report, one that marks a new bottom for the run of disappointing economic data. The street was looking for an improvement in tomorrow's new home sales report but that's definitely now an outdated consensus.

Dan Perkins

FLASH

2010-08-11T22:21:00.004-04:00

Is Ben The Alpha Male in the Wolf Pack?

On June 29 I warned of the power of the Wolf Pack and its impact on the markets. I suggested that I believed that they would come out in mid summer and feed again. On July 17 I wrote about the Wolf Pack feeding again and suggested to my readers that if we didn’t close above the 1110 level on the S&P 500 then the downside could be 850 or so on the S&P 500. If we did close above the 1110 level then it was most likely that the low would be 950 to 975. We closed about 15 points above 1110 so I’m not sure if that 1125 level is good enough to hold the 950 low.

Over the last week we have tried three times to break above the 1127 level on the S&P 500 and each time we fell back. Yesterday the Federal Reserve Open Market Committee told the market their view on the economy and in essence they said, O Sh!! We are in trouble; The markets reacted with a significant sell off in stocks around the world on Wednesday. The demand for US Treasuries, the flight to quality, drove the yield on the 10-year to as low as 2.62% inter day.

I expect that the summer rally is over and we are in the correction I have been looking for. I do not expect panic selling, but a movement down and up into mid September when I think we will hit the 950 to 975 level. We will have to watch and see what happens over the next two weeks to see if the 950 level can hold,

Dan Perkins

Just how bad are the problems is California

2010-08-09T11:05:00.002-04:00

El Centro, California
Population: 41,241

Lose your job in El Centro and it may be quite some time before you find another one. One in four people here are out of work and the city holds the not-so distinguished honor of having the highest unemployment rate -- 27.5% -- in the country (close behind is Yuma, Ariz., with 27.2% unemployment).

The desert city, which is located in Imperial County just across the border from Mexicali, has a jobless rate triple the national average of 9.5% thanks to the seasonal fluctuations of field laborers. Field work is the county's third-largest employment sector after government, transportation and utilities, according to AOL News.

"Its location across the border from a much larger Mexican city means that there is a large floating labor force," Jim Gerber, an economics professor and director of the international business program at San Diego State University, told AOL News. "The data for Imperial County is skewed by this, such that the layoffs and out-of-work laborers are not actually counted correctly."

Even with the ebb and flow of its working population, things are still pretty bleak in El Centro. Last year, the city's cemetery went into foreclosure.

I thought the above was very insightful as to the problems not only in California but other parts of the country. Go to the following link to see the rest of the top ten worst places to live in the US.

http://www.walletpop.com/blog/2010/08/05/10-worst-places-to-live/?icid=main|main|dl6|link1|http%3A%2F%2Fwww.walletpop.com%2Fblog%2F2010%2F08%2F05%2F10-worst-places-to-live%2F

Dan Perkins

FLASH

2010-08-06T13:24:00.002-04:00

Friday August 6, 2010

Futures on the CME Group Inc. exchange showed a 32 percent chance the Fed will raise its target rate for overnight lending between banks at least a quarter-percentage point by the August 2011 meeting, compared with 49 percent odds a week ago.

Time Running Out?

2010-08-03T20:32:00.002-04:00

This Friday the Federal Government will report the unemployment numbers for July that may have the most significant impact on the fall election for the Democrats. Congress is about to go on summer recess for most of August and Labor Day is the official kickoff of the fall mid-term elections.

Through a quirk in the calendar we will have a report this Friday and then again on September 3 and the last one before the election will be Friday October 1. So if the campaign officially starts on Labor Day we will only have one jobs report before the November election.

As the Congressmen and women and Senators who are up for re-election go home this month they will hear, I believe, two clear messages from the electorate. First, it’s about jobs. People want to work and extending unemployment benefits helps people survive, but jobs make families prosper. The second issue is Federal spending. It is out of control. By the time the mid term elections are over the Obama administration will have doubled the national debt that all of the past administrations created. If you really stop and think about that statement it is very scary.

All the debt accumulated in the first 232 years of this country was doubled in just 2 years. With all of that spending we still have unemployment at 9.6% and no real job creations. The administration is playing games with the jobs numbers by talking about the number of jobs saved. No economic model supports the concept of jobs saved. We now have a new number called private sector jobs. The forecast for Friday is for a decline of 70,000 non-farm jobs but an increase of 100,000 private sector jobs. If these numbers miss to the downside look for a sell off in the markets.

People just want the facts. They can look around their neighborhoods and see their neighbors who are out of work, the number of houses for sale and they know somebody who has lost not only their job but also their home.

People want to know what their elected officials are going to do to get people back to work and to help people save their homes and have a secure life for their families. People do not want to be dependent on the government, but the longer we go with a jobless recovery the more people will become dependent on the government. These are the issues that the Congressmen and women and Senators will be asked to address as they travel throughout their states and campaign for reelection in August, September, and October.

I expect you will hear questions from voters like these on the campaign trail:

I want to work, but I can’t find a job. How are you going to make jobs available?

Business has trillions of dollars and they are not spending it to create jobs. What are you going to do to give business and incentive to spend and create jobs?

If we can’t pay our bills how can the government pay its bills with the deficit so high?

How can we afford the new health care program?

How will you make my social security secure?

I’m sure you can think of many other questions that you would like to ask your Congressperson or Senator if he or she is up for reelection. Why not put your thoughts down in an e-mail or a note and sent it to their campaign and see if they respond and if they do what do they say.

If the country was in the mood for change two years ago, then I think it may well be in for another change this November. The issues in the election I think are very basic, it’s about jobs and the economy. There are other issues, the environment, social security, spending, but these and all the rest pale in importance when compared with the other two.

For the first time since the recent presidential election we have all the congress and one third of the senate up for election and all the candidates will be out talking and listening to voters over the next three months.

What will be the outcome of the election? I think if we do not see any improvement in the unemployment numbers over the next three reports then in October the poling data may show a significant shift in the control of both houses of congress. As we see news reports of the mood on the campaign trail then the angrier the voters are the greater the defeat for the Democrats. Will the Democrats lose control of the one or both of the houses of congress? I think it is more likely that we may well see similar election results that we saw in the Clinton midterm when the Republicans took control.

The American people gave the Democrats the White House and both houses of Congress in the last election because they felt they wanted change. I do not think the change they got was the change they wanted and I doubt the democrats will retain all that control on November 2.

Dan Perkins

2010-07-17T13:49:00.001-04:00

FLASH

I warned in an earlier blog that I thought that The "Wolf Pack" would be back by mid summer and start feeding again. The last time we took the S&P 500 down to the support level of 1040 and held I was looking for a bounce off that near term bottom and then thought we would go down again and perhaps break though the 1040 level on it's way to 950 to 975.

I was hopeful that the rally would take us to the 1110 level on the S&P 500 which would have meant that at that level the 950 to 975 level could be the low for the year. However we did not reach the 1110 level before we started down, at least not yet, which tells me that we could go 100 points lower than the 950 to 975 to about 850 to 875.

This week will be important because we closed near the low for the day on Friday, down 31 points off the S&P 500; almost 3% for the day. If we don't make a run at 1110 next week or so then it is only a matter of time until we break the previous low of 1022 and head below 1000. The big question in my mind is will the "Wolf Pack" be satisfied at 950 or 850 level.

Dan Perkins

“Economic Tsunami” Headed Our Way?

2010-07-05T23:29:00.000-04:00

I believe that an “Economic Tsunami” may be heading to the United States from Euro Land. Clearly there was a conflict at the most recent meeting of the G20 in Toronto over cutting budgets (austerity) vs. expanding governmental budgets (stimulus). Many of the socialist countries in the European Union have found themselves in a very difficult position of breaking promises because they are running out of money.

In Greece, for example, the unions must give back 20% of their income in order to make the country more competitive in the global markets. What is so surprising to me is that the union leadership so quickly agreed to the givebacks. While the rank and file may not agree to these concessions they were necessary to have a chance for the country to survive. The labor union members are not the only people in Greece, or any other country, that will have to make concessions. The rest of both the private and public sectors will also have to make givebacks. By reducing the costs the Greeks hope that they can be more competitive in the global markets and sell more.

The rest of the PIIGS countries and even the United Kingdom are considering making serious budget cuts and increasing taxes in order to reduce debt and get the budgets under control. At the G20 meeting our president seemed to be the lone wolf preaching that “it’s too soon to stop spending” and he encouraged the union and Britain to expand budgets not cut them.

In the United States we are finally beginning to understand the magnitude of the debt we have already issued and the staggering amount of unfunded liabilities. The Congress this past week did not extend unemployment benefits to 1.3 million Americans. There seems to be a real debate as to the role of the Federal Government in the funding of state and local budgets. Many in Congress do not want a repeat of what was done in the previous stimulus package to bail out the states. If Congress doesn’t pass the funding to the states then many states may well go into default. Some people have a misconception about states going bankrupt. It is my understanding that local governments and agencies like school boards can file for bankruptcy however states can only declare that they are in default of their debts. When a state government defaults they stop paying interest on their borrowings and may stop making payments on other types of liabilities in order to conserve cash revenue.

American labor unions may well be faced with some serious decisions much like their counter parts in Europe as the “Economic Tsunami” hits the American shores perhaps as soon as late this year. Will the teachers, state workers, teamsters and other union members be willing to take less in order to keep jobs? Can the public sector employees expect to continue to receive the level of compensation and benefits they have received in the past? I do not think so.

With the economy predicted to slip in the third and fourth quarters of 2010 and with reduced economic outlook for 2011, the outcome of the general election in November is in doubt. The European countries are reducing leverage to try to strengthen their balance sheets. Many Americans are working to get their personal balance sheets in better shape. I expect interest rates to continue to fall and a substantial flattening of the yield spread between 30-Day T-Bills and 30 year T-bonds.

I have said to all of you many times, “get paid while you wait.” I think the best opportunity in the second half of 2010 and all of 2011 is to own assets that pay income. The things I like are the things that you, as clients, and I already own and I will be adding to our positions things like preferred stocks, Master Limited Partnerships and Royalty Trusts. These pay us returns greater than cash and better returns even than 30 year T-Bonds. We are in for an extended period of deflation therefore income producing investments will protect you.

Just cash the checks.

As was indicated in my last Flash, Merrill Lynch thinks that the Fed will stay at zero until at least the first quarter 2012 and readers of this Blog know that I think it will be at least 2013. Perhaps Merrill will make an adjustment in the future and extend the on-hold period. If Merrill is correct then many money market mutual funds will have paid zero or close to zero for almost 4 years to their shareholders.

Dan Perkins

Flash from Bank of America

2010-07-03T11:56:00.000-04:00

It appears that someone else agrees with me that interest rates will stay low for an extended period of time.

Dan Perkins

Interest Rate Committee Forecast

Bank of America Merrill Lynch

Slower growth, lower rates Later Fed, lower 10-year yields

We now expect the Fed to be on hold until early 2012 and the 10-year yield to end
the year at 3.25%. The new outlook reflects weaker growth, somewhat lower
inflation, the continued lack of supply of high grade paper, and the potential for
fiscal restraint in the US. In addition, we expect overseas demand for Treasuries
to get even stronger, as reserve managers likely increase allocations to USD, and
thereby Treasuries. However, we do not see a double-dip in the economy and we
do not expect the Fed to adopt quantitative easing any time soon.
Economic Analysis
Economics | United States
02 July 2010