Are state pension plan fixes breaking retirement promises?

September 21st, 2010

Nilus Mattive

In early July, I told you how lawmakers have consistently overpromised and underdelivered when it comes to retirement plans for state and local government workers. And why, in doing so, they’ve only heaped another level of burden on our entire nation’s already-fragile financial picture.

But according to data compiled for the recent Bloomberg Cities and Debt Briefing held in New York last week, the situation just keeps deteriorating:

Less than half of state retirement systems had enough assets to pay even 80 percent of the benefits they’ve already promised!

Now, politicians are rushing to “fix” their past mistakes, and the situation is getting downright ugly.

Take New Jersey, for example.

According to Bloomberg, the state’s plan currently ranks number 11 on the list of most underfunded pension systems.

And as you might recall from my previous article, recent estimates have said New Jersey’s plan will run out of money in 2019 … IF the state manages to get an annual investment return of eight percent! With a lower return, the fund may last only five more years.

That’s why, last week, Governor Chris Christie announced his latest proposal to reform the state’s public pension and health care system.

New Jersey has already reduced benefits for new state hires, but Governor Christie’s latest proposal is far more dramatic. Some of the measures he’s suggesting:

  • Reverse a nine percent benefit increase that was enacted in 2001
  • Raise the state’s retirement age to 65, and allow early retirement after 30 years of service vs. 25 currently
  • Ask teachers and government workers to kick in 30 percent of their health insurance costs from about eight percent now — with the increases stepping up over a four-year period
  • Lower the state’s assumed investment return from a current 8.25 percent to 7.5 percent
  • And halt cost-of-living adjustments for current retirees until the state can afford to pay them

Personally, I wonder if a 7.5 percent annual return is still too aggressive given today’s investing climate and how conservatively a pension fund should be invested.

But regardless of where you stand on each of the proposed moves, they prove that even CURRENT retirees’ benefits aren’t necessarily guaranteed in these crazy times.

Consider the Pension Court Battle
Happening in Minnesota Right Now …

So far this year, sixteen states have overhauled their pension plans. Three of them — Minnesota, Colorado, and South Dakota — have also gone so far as to trim the cost of living adjustments for current pensioners … just as Governor Christie is now proposing.

Those legislative efforts are currently being challenged in the courts, with Minnesota’s getting to a judge first.

Last Wednesday, the plaintiffs were granted a request for additional time for discovery … so the outcome is still up in the air.

But make no mistake: This case is being watched by hundreds of thousands of retirees and politicians around the nation.

Retirees from New Jersey to Minnesota are up in arms over proposed changes to their state pension plans.
Retirees from New Jersey to Minnesota are up in arms over proposed changes to their state pension plans.

In the meantime, Minnesota retirees are left with quotes like the following, from the state’s Assistant Attorney General Rita Coyle DeMueles …

Arguing that Minnesota has the right to modify benefits being paid to pensioners, she said, “There is no contract here, express or implied.”

Many of the folks who thought their retirement benefits were guaranteed may be surprised to hear that!

Moreover, all of these state pension woes and attempted clawbacks make me wonder whether we will soon be hearing the same debate at the national level — over our entire Social Security system.

Already, there are indications that lawmakers are working behind the scenes to close off certain options that are currently available to retirees! [Editor's note: For more on this, and Nilus' recommendations on what to do for your own retirement, click here.]

And can anyone say that Social Security is any more fundamentally sound than these state pensions? Or that its promises are any more guaranteed?

Scary stuff, indeed.

Best wishes,

Nilus


About Money and Markets

For more information and archived issues, visit http://www.moneyandmarkets.com

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

From time to time, Money and Markets may have information from select third-party advertisers known as “external sponsorships.” We cannot guarantee the accuracy of these ads. In addition, these ads do not necessarily express the viewpoints of Money and Markets or its editors. For more information, see our terms and conditions.

Commodities, ETF, Mutual Fund, OPTIONS, Uncategorized

Are state pension plan fixes breaking retirement promises?

September 21st, 2010

Nilus Mattive

In early July, I told you how lawmakers have consistently overpromised and underdelivered when it comes to retirement plans for state and local government workers. And why, in doing so, they’ve only heaped another level of burden on our entire nation’s already-fragile financial picture.

But according to data compiled for the recent Bloomberg Cities and Debt Briefing held in New York last week, the situation just keeps deteriorating:

Less than half of state retirement systems had enough assets to pay even 80 percent of the benefits they’ve already promised!

Now, politicians are rushing to “fix” their past mistakes, and the situation is getting downright ugly.

Take New Jersey, for example.

According to Bloomberg, the state’s plan currently ranks number 11 on the list of most underfunded pension systems.

And as you might recall from my previous article, recent estimates have said New Jersey’s plan will run out of money in 2019 … IF the state manages to get an annual investment return of eight percent! With a lower return, the fund may last only five more years.

That’s why, last week, Governor Chris Christie announced his latest proposal to reform the state’s public pension and health care system.

New Jersey has already reduced benefits for new state hires, but Governor Christie’s latest proposal is far more dramatic. Some of the measures he’s suggesting:

  • Reverse a nine percent benefit increase that was enacted in 2001
  • Raise the state’s retirement age to 65, and allow early retirement after 30 years of service vs. 25 currently
  • Ask teachers and government workers to kick in 30 percent of their health insurance costs from about eight percent now — with the increases stepping up over a four-year period
  • Lower the state’s assumed investment return from a current 8.25 percent to 7.5 percent
  • And halt cost-of-living adjustments for current retirees until the state can afford to pay them

Personally, I wonder if a 7.5 percent annual return is still too aggressive given today’s investing climate and how conservatively a pension fund should be invested.

But regardless of where you stand on each of the proposed moves, they prove that even CURRENT retirees’ benefits aren’t necessarily guaranteed in these crazy times.

Consider the Pension Court Battle
Happening in Minnesota Right Now …

So far this year, sixteen states have overhauled their pension plans. Three of them — Minnesota, Colorado, and South Dakota — have also gone so far as to trim the cost of living adjustments for current pensioners … just as Governor Christie is now proposing.

Those legislative efforts are currently being challenged in the courts, with Minnesota’s getting to a judge first.

Last Wednesday, the plaintiffs were granted a request for additional time for discovery … so the outcome is still up in the air.

But make no mistake: This case is being watched by hundreds of thousands of retirees and politicians around the nation.

Retirees from New Jersey to Minnesota are up in arms over proposed changes to their state pension plans.
Retirees from New Jersey to Minnesota are up in arms over proposed changes to their state pension plans.

In the meantime, Minnesota retirees are left with quotes like the following, from the state’s Assistant Attorney General Rita Coyle DeMueles …

Arguing that Minnesota has the right to modify benefits being paid to pensioners, she said, “There is no contract here, express or implied.”

Many of the folks who thought their retirement benefits were guaranteed may be surprised to hear that!

Moreover, all of these state pension woes and attempted clawbacks make me wonder whether we will soon be hearing the same debate at the national level — over our entire Social Security system.

Already, there are indications that lawmakers are working behind the scenes to close off certain options that are currently available to retirees! [Editor's note: For more on this, and Nilus' recommendations on what to do for your own retirement, click here.]

And can anyone say that Social Security is any more fundamentally sound than these state pensions? Or that its promises are any more guaranteed?

Scary stuff, indeed.

Best wishes,

Nilus


About Money and Markets

For more information and archived issues, visit http://www.moneyandmarkets.com

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

From time to time, Money and Markets may have information from select third-party advertisers known as “external sponsorships.” We cannot guarantee the accuracy of these ads. In addition, these ads do not necessarily express the viewpoints of Money and Markets or its editors. For more information, see our terms and conditions.

Commodities, ETF, Mutual Fund, OPTIONS, Uncategorized

Exploiting Bernanke, Part One of Two

September 21st, 2010

It is unfortunate the media does not make better use of an accessible resource: itself. Newspapers and financial TV are generally content to report what is being said today with no reference to the past. There seems to be no memory. A recent instance is Federal Reserve Chairman Ben Bernanke’s opinion that inflation is not a concern. In a sane world, his opinion would not matter much. We live in a more nonsensical atmosphere in which abstractions substitute for reality.

The Fed chairman’s inflation prediction is thought to reflect whether the Federal Reserve’s Open Market Committee (FOMC) will raise the fed funds rate from zero. It is not, then, Bernanke’s opinion about inflation that stirs imaginations (very limited imaginations, to be sure), but the train-of-thought that the global yield curve is a consequence of his purported wisdom. If the Fed Chairman’s public view changes, the residence of several trillion dollars will also change: carry trades, institutional asset mixes, and potential reallocations from stocks into money markets are examples of financial securities that are shipped from asset class to asset class according to the Fed chairman’s price-change gazetteer.

The real world today is repeating a pattern of a couple of years back. Prices are rising everywhere. This was also true when Bernanke became chairman of the Fed, in February 2006. Shortages, bottlenecks, black markets and prices were increasing when Bernanke became chairman. They continued to do so into late 2008. These conditions then retreated but are charging upward again.

To cut to the finale, a search through the files shows that Ben Bernanke was neither concerned nor understood the 2006 to 2008 inflation. It is certain, reading the evidence, that once again he will ignore (or remain malignantly ignorant, as the case may be) inflation until long after rice riots outside California supermarkets are a feature on the evening news.

To those unaccustomed to Fed-foolery, there is a motive for the chairman to day-dream through an inflationary swindle. The Federal Reserve wants to print money at will. An admitted problem with inflation would make it difficult to keep pumping money into the market.

Two conclusions can be drawn with near-certainty: the FOMC will not raise its zero-percent fed funds rate as long as Ben Bernanke remains Federal Reserve chairman. (A trivial 0.25% or 0.50% increase is possible.) Prices of things, particularly of commodities, will keep rising. This is an area to make money.

The Prosecutor’s Brief

In 2006, Bernanke had the excuse of being new to the job, without his predecessor’s experience at judging how every comment would be interpreted and analyzed. In the end, his inexperience with the media was not a disadvantage. (Discussed in the past tense, all of this is just as true today.) He talked in circles, made little sense, but criticism of the Federal Reserve Chairman’s remarks was confined to vocabulary. He could have bellowed his discontinuities of thought, of logic, of basic economics through the public address system before a full house at Yankee Stadium and the financial media would have remained deferential. An instance was his inflation commentary. An abbreviated sequence of Bernankeism follows.

Chairman Bernanke discussed inflation before the Joint Economic Committee on April 27, 2006. He sent written responses to the committee following his testimony. In this take-home exam, the new Fed chairman pronounced “inflation is overstated” and expectations are “well contained.” His contentions were controversial, not for the obvious reason that crude oil prices had risen 50% since the beginning of 2005. Such comparisons between what is real and what Bernanke recites do not interest the media. Again, his economics are illogical. This was the real story, but was not discussed.

Instead, the press and financial TV grew aggressively neurotic when the Federal Reserve issued a statement, on May 10, that inflationary expectations are “contained.” The media was consumed with the distinction from “well contained” in Bernanke’s April 27, 2006, statement.

On June 5, Bernanke, speaking at the IMF, admitted inflation, not inflationary expectations, was a problem. Again this distinction in vocabulary was front page news. Barely discussed were announcements in the same week that mergers and acquisitions for the year had already passed the record level of 2000 ($1.4 trillion), private equity in Europe was “loading companies with a record amount of debt,” and home mortgage debt in the U.S. was increasing at a 12.2% pace (when the national income was rising at a 3% rate).

On June 15, 2006, Bernanke spoke about expectations (not inflation, as he had on June 5). He believed expectations remained within historic ranges, which seemed to be consistent with his May 10 statement, but he was chastised for “giving mixed signals,” maybe because he discussed expectations rather than inflation, though this was not clear, and who cared other than the panting, breaking-news media and the trading desks that might unwind billion-dollar arbitrage positions in reaction to the media’s portrayal of the Fed chairman’s word choice?

On November 28, 2006, he told the National Italian American Foundation that inflation expectations were “contained.” He repeated this assessment on many other occasions. The chairman may have thought his personal contentment would sooth the masses. Whatever the case, Simple Ben applied the formula to any topic that popped into his head. On March 28th, 2007: “At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.”

In his November 2006, address to the National Italian American Foundation, Bernanke talked in clichés that had lost all meaning. He would “continue to monitor the incoming data closely.” The FOMC is “prepared to take action to address inflation if developments warrant.” The chairman, at best, made glancing references to what he was monitoring, when the FOMC would take action, and what form the action might take.

Seven months later, in July 2007, Bernanke finally gave a speech devoted to the Federal Reserve’s measurement of inflation: “First, how should the central bank best monitor the public’s inflation expectations?”  Bernanke’s description of the Fed’s methods could not be refuted, since there was nothing to refute: “The Board staff employs a variety of formal models, both structural and purely statistical, in its forecasting efforts. However, the forecasts of inflation (and of other key macroeconomic variables) that are provided to the Federal Open Market Committee are developed through an eclectic process that combines model-based projections, anecdotal and other ‘extra-model’ information, and professional judgment. In short, for all the advances that have been made in modeling and statistical analysis, practical forecasting continues to involve art as well as science.” This means nothing. Dan Quayle was ransacked for misspelling “potato,” yet the media adored Bernanke for sounding like an idiot savant.

He went on to ask critical questions (e.g.: “Do we need new measures of expectations or new surveys?”). There were no answers. Bernanke described some of the inputs to the Fed’s models, but then crushed hopes of those who were trying to understand how the Fed measures expectations: “[T]he model specifications employed differ considerably in their details, including how lagged inflation enters the equation, how resource utilization is measured, and whether a survey-based measure of inflation expectations is included. In principle, formal econometric tests could determine how much weight should be put on the forecast of each model, but in practice the data do not permit sharp inferences….” In the end, he confirmed what Fed skeptics already believed – the Federal Reserve is a Works Project Administration for failed statisticians: “Because of these considerations, as I have already noted, the staff’s inflation forecasts inevitably reflect a substantial degree of expert judgment and the use of information not captured by the models.”

Others disagreed. In April 2007, Harry Landis, 107 years old, a World War I veteran, was interviewed by the St. Petersburg (Florida) Times: Landis had “lived through the invention of airplanes, televisions, interstate highways and cell phones. But the biggest change? ‘Money has decreased in value,’ he said. ‘There is so much more of it.’”

Not according to Simple Ben. On July 10, 2007, Bernanke addressed current inflation, then dismissed it: “The steep run-up in oil prices in recent years has not triggered either high inflation or recession, in large part because consumers and businesses expect price increases to remain tame.” Three days before Bernanke spoke, Lehman Brothers (R.I.P.) released its food ingredients cost index for the first 6 months of 2007. It had risen 14.9%.
 
The value of stuff was rising against dollars and against paper assets in general. Detachment of prices from previous levels leads to poverty, desperation, and crime.

California suffered a copper crime wave. Irrigation systems were stripped from farms; their replacement had cost $2 billion in 2006, a 400% increase from 2005. Value investors “pulled plaques off cemetery plots, raided air-conditioning systems in schools, yanked catalytic converters from cars.” The copper in a penny was worth more than one cent; the Treasury Department decided melting pennies for the copper was a crime with a sentence of up to five years in jail. In Britain, Monopoly, the board game, cut costs by replacing paper money with a calculator. In the United States, those who lacked formal education knew best: Twenty-two percent with a high school education or less named the economy as the country’s worst problem, compared to eight percent with college degrees. Through history, inflation first attacked the lower classes and not stopped until it consumed the upper classes. This time looks no different.

Regards,

Frederick Sheehan,
for The Daily Reckoning

[For more of Frederick Sheehan's perspective you can visit his blogs here and at www.AuContrarian.com. You can also purchase his book, Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009), here.]

Exploiting Bernanke, Part One of Two originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Exploiting Bernanke, Part One of Two




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

Exploiting Bernanke, Part One of Two

September 21st, 2010

It is unfortunate the media does not make better use of an accessible resource: itself. Newspapers and financial TV are generally content to report what is being said today with no reference to the past. There seems to be no memory. A recent instance is Federal Reserve Chairman Ben Bernanke’s opinion that inflation is not a concern. In a sane world, his opinion would not matter much. We live in a more nonsensical atmosphere in which abstractions substitute for reality.

The Fed chairman’s inflation prediction is thought to reflect whether the Federal Reserve’s Open Market Committee (FOMC) will raise the fed funds rate from zero. It is not, then, Bernanke’s opinion about inflation that stirs imaginations (very limited imaginations, to be sure), but the train-of-thought that the global yield curve is a consequence of his purported wisdom. If the Fed Chairman’s public view changes, the residence of several trillion dollars will also change: carry trades, institutional asset mixes, and potential reallocations from stocks into money markets are examples of financial securities that are shipped from asset class to asset class according to the Fed chairman’s price-change gazetteer.

The real world today is repeating a pattern of a couple of years back. Prices are rising everywhere. This was also true when Bernanke became chairman of the Fed, in February 2006. Shortages, bottlenecks, black markets and prices were increasing when Bernanke became chairman. They continued to do so into late 2008. These conditions then retreated but are charging upward again.

To cut to the finale, a search through the files shows that Ben Bernanke was neither concerned nor understood the 2006 to 2008 inflation. It is certain, reading the evidence, that once again he will ignore (or remain malignantly ignorant, as the case may be) inflation until long after rice riots outside California supermarkets are a feature on the evening news.

To those unaccustomed to Fed-foolery, there is a motive for the chairman to day-dream through an inflationary swindle. The Federal Reserve wants to print money at will. An admitted problem with inflation would make it difficult to keep pumping money into the market.

Two conclusions can be drawn with near-certainty: the FOMC will not raise its zero-percent fed funds rate as long as Ben Bernanke remains Federal Reserve chairman. (A trivial 0.25% or 0.50% increase is possible.) Prices of things, particularly of commodities, will keep rising. This is an area to make money.

The Prosecutor’s Brief

In 2006, Bernanke had the excuse of being new to the job, without his predecessor’s experience at judging how every comment would be interpreted and analyzed. In the end, his inexperience with the media was not a disadvantage. (Discussed in the past tense, all of this is just as true today.) He talked in circles, made little sense, but criticism of the Federal Reserve Chairman’s remarks was confined to vocabulary. He could have bellowed his discontinuities of thought, of logic, of basic economics through the public address system before a full house at Yankee Stadium and the financial media would have remained deferential. An instance was his inflation commentary. An abbreviated sequence of Bernankeism follows.

Chairman Bernanke discussed inflation before the Joint Economic Committee on April 27, 2006. He sent written responses to the committee following his testimony. In this take-home exam, the new Fed chairman pronounced “inflation is overstated” and expectations are “well contained.” His contentions were controversial, not for the obvious reason that crude oil prices had risen 50% since the beginning of 2005. Such comparisons between what is real and what Bernanke recites do not interest the media. Again, his economics are illogical. This was the real story, but was not discussed.

Instead, the press and financial TV grew aggressively neurotic when the Federal Reserve issued a statement, on May 10, that inflationary expectations are “contained.” The media was consumed with the distinction from “well contained” in Bernanke’s April 27, 2006, statement.

On June 5, Bernanke, speaking at the IMF, admitted inflation, not inflationary expectations, was a problem. Again this distinction in vocabulary was front page news. Barely discussed were announcements in the same week that mergers and acquisitions for the year had already passed the record level of 2000 ($1.4 trillion), private equity in Europe was “loading companies with a record amount of debt,” and home mortgage debt in the U.S. was increasing at a 12.2% pace (when the national income was rising at a 3% rate).

On June 15, 2006, Bernanke spoke about expectations (not inflation, as he had on June 5). He believed expectations remained within historic ranges, which seemed to be consistent with his May 10 statement, but he was chastised for “giving mixed signals,” maybe because he discussed expectations rather than inflation, though this was not clear, and who cared other than the panting, breaking-news media and the trading desks that might unwind billion-dollar arbitrage positions in reaction to the media’s portrayal of the Fed chairman’s word choice?

On November 28, 2006, he told the National Italian American Foundation that inflation expectations were “contained.” He repeated this assessment on many other occasions. The chairman may have thought his personal contentment would sooth the masses. Whatever the case, Simple Ben applied the formula to any topic that popped into his head. On March 28th, 2007: “At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.”

In his November 2006, address to the National Italian American Foundation, Bernanke talked in clichés that had lost all meaning. He would “continue to monitor the incoming data closely.” The FOMC is “prepared to take action to address inflation if developments warrant.” The chairman, at best, made glancing references to what he was monitoring, when the FOMC would take action, and what form the action might take.

Seven months later, in July 2007, Bernanke finally gave a speech devoted to the Federal Reserve’s measurement of inflation: “First, how should the central bank best monitor the public’s inflation expectations?”  Bernanke’s description of the Fed’s methods could not be refuted, since there was nothing to refute: “The Board staff employs a variety of formal models, both structural and purely statistical, in its forecasting efforts. However, the forecasts of inflation (and of other key macroeconomic variables) that are provided to the Federal Open Market Committee are developed through an eclectic process that combines model-based projections, anecdotal and other ‘extra-model’ information, and professional judgment. In short, for all the advances that have been made in modeling and statistical analysis, practical forecasting continues to involve art as well as science.” This means nothing. Dan Quayle was ransacked for misspelling “potato,” yet the media adored Bernanke for sounding like an idiot savant.

He went on to ask critical questions (e.g.: “Do we need new measures of expectations or new surveys?”). There were no answers. Bernanke described some of the inputs to the Fed’s models, but then crushed hopes of those who were trying to understand how the Fed measures expectations: “[T]he model specifications employed differ considerably in their details, including how lagged inflation enters the equation, how resource utilization is measured, and whether a survey-based measure of inflation expectations is included. In principle, formal econometric tests could determine how much weight should be put on the forecast of each model, but in practice the data do not permit sharp inferences….” In the end, he confirmed what Fed skeptics already believed – the Federal Reserve is a Works Project Administration for failed statisticians: “Because of these considerations, as I have already noted, the staff’s inflation forecasts inevitably reflect a substantial degree of expert judgment and the use of information not captured by the models.”

Others disagreed. In April 2007, Harry Landis, 107 years old, a World War I veteran, was interviewed by the St. Petersburg (Florida) Times: Landis had “lived through the invention of airplanes, televisions, interstate highways and cell phones. But the biggest change? ‘Money has decreased in value,’ he said. ‘There is so much more of it.’”

Not according to Simple Ben. On July 10, 2007, Bernanke addressed current inflation, then dismissed it: “The steep run-up in oil prices in recent years has not triggered either high inflation or recession, in large part because consumers and businesses expect price increases to remain tame.” Three days before Bernanke spoke, Lehman Brothers (R.I.P.) released its food ingredients cost index for the first 6 months of 2007. It had risen 14.9%.
 
The value of stuff was rising against dollars and against paper assets in general. Detachment of prices from previous levels leads to poverty, desperation, and crime.

California suffered a copper crime wave. Irrigation systems were stripped from farms; their replacement had cost $2 billion in 2006, a 400% increase from 2005. Value investors “pulled plaques off cemetery plots, raided air-conditioning systems in schools, yanked catalytic converters from cars.” The copper in a penny was worth more than one cent; the Treasury Department decided melting pennies for the copper was a crime with a sentence of up to five years in jail. In Britain, Monopoly, the board game, cut costs by replacing paper money with a calculator. In the United States, those who lacked formal education knew best: Twenty-two percent with a high school education or less named the economy as the country’s worst problem, compared to eight percent with college degrees. Through history, inflation first attacked the lower classes and not stopped until it consumed the upper classes. This time looks no different.

Regards,

Frederick Sheehan,
for The Daily Reckoning

[For more of Frederick Sheehan's perspective you can visit his blogs here and at www.AuContrarian.com. You can also purchase his book, Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009), here.]

Exploiting Bernanke, Part One of Two originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Exploiting Bernanke, Part One of Two




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

PIMCO Introduces Build America Bond ETF

September 21st, 2010

Pimco, one of the world’s largest bond firms, just launched its latest municipal exchange traded fund (ETF), the Pimco Build America Bond Strategy Fund (BABZ).

BABZ will carry an expense ratio of 0.45% and aims to achieve its investment objective in focusing its asset base on taxable municipal debt securities which are publicly issued under the President Obama’s Build America Bond program.  Furthermore, the fund generally invests in U.S. dollar denominated fixed income instruments that are investment grade but may allocate a percentage of assets to higher yield junk bonds which have a higher likelihood of default. 

In regards to characteristics of Build America Bonds, they are special municipal bonds designed to help municipalities raise money to invest in infrastructure projects.  The bonds are taxable; however, the Federal government pays a 35% subsidy on the interest payments to offset the tax hit.   Additionally, issuance of Build America Bonds will cease on December 31, 2010 unless the relevant provisions of the American Recovery and Reinvestment Act of 2009 are extended. In the event that the Build America Bond program is not extended, the Build America Bonds outstanding at such time will continue to be eligible for the federal interest rate subsidy, which continues for the life of the Build America Bonds; however, no bonds issued following expiration of the Build America Bond program will be eligible for the federal tax subsidy.

The introduction of BABZ comes at a time when fixed income ETFs are witnessing an increase in assets as investors are shunning risk and looking for “safe” investment tools which enable some to pick up additional yield without taking on enormous risk.   

As for competition, BABZ will be going up against the PowerShares Build America Bond Portfolio (BAB),  which has attracted more than $547 million in assets since its inception in December and the SPDR Nuveen Barclays Capital Build America Bond ETF (BABS), the Nuveen Build America Bond Fund (NBB) and the BlackRock Build America Bond Fund (BBN). 

Disclosure: No Positions

Read more here:
PIMCO Introduces Build America Bond ETF




HERE IS YOUR FOOTER

ETF, Uncategorized

Expiring Monthly September 2010 Issue Recap

September 20th, 2010

Just a quick reminder that a new options expiration cycle means a new issue of Expiring Monthly: The Option Traders Journal is available. In fact the September issue was published today and is available for subscribers to download.

The September edition features a handful of articles on the subject of directional trading with options, including a feature article from Mark Wolfinger and a guest article from Steven Place of Investing with Options.

In addition to my regular gig as authoring Editor’s Notes, this month I have also contributed the second in a three-part series on the VIX futures term structure. The current installment lays out a six-part framework for analyzing VIX futures which establishes a foundation for next month’s finale, in which I discuss some of the implications for various VIX term structure patterns as they apply to trading VIX options and VIX ETNs such as VXX.

I have reproduced a copy of the Table of Contents for the September issue to the right for those who may be interested in learning more about the magazine. Subscription information and additional details about the magazine are available at http://www.expiringmonthly.com/.

Related posts:

[source: Expiring Monthly]

Disclosure(s): I am one of the founders and owners of Expiring Monthly



Read more here:
Expiring Monthly September 2010 Issue Recap

OPTIONS, Uncategorized

Expiring Monthly September 2010 Issue Recap

September 20th, 2010

Just a quick reminder that a new options expiration cycle means a new issue of Expiring Monthly: The Option Traders Journal is available. In fact the September issue was published today and is available for subscribers to download.

The September edition features a handful of articles on the subject of directional trading with options, including a feature article from Mark Wolfinger and a guest article from Steven Place of Investing with Options.

In addition to my regular gig as authoring Editor’s Notes, this month I have also contributed the second in a three-part series on the VIX futures term structure. The current installment lays out a six-part framework for analyzing VIX futures which establishes a foundation for next month’s finale, in which I discuss some of the implications for various VIX term structure patterns as they apply to trading VIX options and VIX ETNs such as VXX.

I have reproduced a copy of the Table of Contents for the September issue to the right for those who may be interested in learning more about the magazine. Subscription information and additional details about the magazine are available at http://www.expiringmonthly.com/.

Related posts:

[source: Expiring Monthly]

Disclosure(s): I am one of the founders and owners of Expiring Monthly



Read more here:
Expiring Monthly September 2010 Issue Recap

OPTIONS, Uncategorized

El-Erian on Developed Nations: Happy (Indeed Eager) to See Their Currencies Depreciate

September 20th, 2010

Mohamed El-Erian, CEO and Co-CIO at Pimco — the world’s largest bond fund — recently contributed a guest post to the FT spelling out his concerns regarding the “global configuration of currencies,” or more plainly, what’s quickly becoming a race to the currency-weakening bottom among industrialized nations.

He begins by noting Japan’s $21 billion currency sale last week — to bring the yen down from a 15-year high versus the dollar — and then goes on to discuss the intervention’s relevance to the usual coinage-depreciating suspects.

From the FT:

“Meanwhile, in a sharply-worded testimony to Congress, Treasury Secretary Geithner provided lots of data to those that feel that the US should have already labeled China a currency manipulator. And while China has recently accelerated the rate of its managed appreciation — 1% in the last week compared to just 1.6% since the country declared great “flexibility” back in June — this is proving insufficient to counter growing currency tensions.

“These latest foreign exchange developments bring to the fore an inconvenient reality. While not all industrial countries wish to make it explicit, they are happy (indeed eager) to see their currencies depreciate. They see this as helping them address the extremely difficult challenges associated with a protracted period of low growth, high unemployment, and limited policy effectiveness.

“The list of industrial countries wishing to depreciate their currencies is not matched by a list of emerging economies happy to let their currencies appreciate significantly. As a result, foreign exchange tensions are mounting, and the price of gold has been driven to a new record level.”

Whether it’s under the guise of stimulus or quantitative easing, the industrialized nations — now both in the East and West — are willingly debasing their currencies as a shortcut to boost exports and monetize debt. Developing nations like China are hardly slow to pick up on the ruse, and remain in no rush to pick up the slow-growth hot potato by allowing their currencies to appreciate. Exchange rate tensions are rising, and creating the sort of dilemma that can only end poorly… no country will stand to gain as paper money continues in descent towards its inherent value of zero.

You can read more of El-Erian’s thoughts in his FT guest post on how an interesting week lies ahead.

Best,

Rocky Vega,
The Daily Reckoning

El-Erian on Developed Nations: Happy (Indeed Eager) to See Their Currencies Depreciate originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
El-Erian on Developed Nations: Happy (Indeed Eager) to See Their Currencies Depreciate




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

El-Erian on Developed Nations: Happy (Indeed Eager) to See Their Currencies Depreciate

September 20th, 2010

Mohamed El-Erian, CEO and Co-CIO at Pimco — the world’s largest bond fund — recently contributed a guest post to the FT spelling out his concerns regarding the “global configuration of currencies,” or more plainly, what’s quickly becoming a race to the currency-weakening bottom among industrialized nations.

He begins by noting Japan’s $21 billion currency sale last week — to bring the yen down from a 15-year high versus the dollar — and then goes on to discuss the intervention’s relevance to the usual coinage-depreciating suspects.

From the FT:

“Meanwhile, in a sharply-worded testimony to Congress, Treasury Secretary Geithner provided lots of data to those that feel that the US should have already labeled China a currency manipulator. And while China has recently accelerated the rate of its managed appreciation — 1% in the last week compared to just 1.6% since the country declared great “flexibility” back in June — this is proving insufficient to counter growing currency tensions.

“These latest foreign exchange developments bring to the fore an inconvenient reality. While not all industrial countries wish to make it explicit, they are happy (indeed eager) to see their currencies depreciate. They see this as helping them address the extremely difficult challenges associated with a protracted period of low growth, high unemployment, and limited policy effectiveness.

“The list of industrial countries wishing to depreciate their currencies is not matched by a list of emerging economies happy to let their currencies appreciate significantly. As a result, foreign exchange tensions are mounting, and the price of gold has been driven to a new record level.”

Whether it’s under the guise of stimulus or quantitative easing, the industrialized nations — now both in the East and West — are willingly debasing their currencies as a shortcut to boost exports and monetize debt. Developing nations like China are hardly slow to pick up on the ruse, and remain in no rush to pick up the slow-growth hot potato by allowing their currencies to appreciate. Exchange rate tensions are rising, and creating the sort of dilemma that can only end poorly… no country will stand to gain as paper money continues in descent towards its inherent value of zero.

You can read more of El-Erian’s thoughts in his FT guest post on how an interesting week lies ahead.

Best,

Rocky Vega,
The Daily Reckoning

El-Erian on Developed Nations: Happy (Indeed Eager) to See Their Currencies Depreciate originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
El-Erian on Developed Nations: Happy (Indeed Eager) to See Their Currencies Depreciate




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Inflationary Understatement

September 20th, 2010

The Market Oracle newsletter jumps into the inflation-deflation debate, and says, “Debt deleveraging deflation completely ignores the fact that we are NOT living in the 1930’s, but in a globalised world economy that is seeing the convergence of real GDPs where the developing world is eating up the [world’s] resources at a faster pace then the west is cutting back on consumption.”

Something in my Puny Mogambo Brain (PMB) went, “Ding!” when I instantly recognized this as a classic case of the age-old supply/demand dynamic where price equilibrates demand with supply, in this case the increasing demand from the “developing world” is swamping demand from the “developed” world, meaning an increased demand, but with no mention of the physical supply of resources, which are hard to increase and are, in the short run at least, absolutely fixed.

So any increase in demand means pressure towards an increase in price.

As one would expect from the infallible demand/supply dynamic, when demand is going up when supply is not likewise going up, the market clears at higher prices, and Mr. Oracle seems to be in complete agreement with me on this, and says that increasing demand is “driving inflation higher whilst at the same time the west is engaged in competitive currency devaluations in an attempt to generate nominal GDP growth,” which is where I paused, as I fully expected him to accurately finish the sentence with “which is going to destroy the buying power of every one of those stupid currencies, including the dollar, which the Federal Reserve has destroyed with their insane neo-Keynesian econometric stupidities and outright frauds to create suicidal amounts of money, meaning suicidal amounts of inflation will destroy the people!”

Alas, he did not summarize it that way. Instead, the Market Oracle wins this week’s Mogambo Egon Spengler Prize (MESP), a coveted award named after the character played by Harold Ramis in the movie Ghostbusters who, when asked by the stupid little EPA investigator why the power to the containment grid should not be turned off, did not say, “Because it would release such unimaginable horrors that it would destroy us all in an unstoppable catastrophic disaster where the survivors would envy the dead, and would be unpaid slaves, cruelly treated with no salary, benefits or OSHA protections of any kind, toiling endlessly to please to a hideous demon that lives on the psychic energy of inflicting everlasting pain and suffering until the world is destroyed and every last one of us is dead after being painfully rendered asunder, tearing off your arms and legs, one after another, limb after limb!”

Instead, in a moment that will live forever as the Mogambo Egon Spengler Prize (MESP), Egon Spengler replied, deadpan, emotionless, looking right into the face of the EPA jerk, “Because it would be bad,” which is, if you have seen Ghostbusters, probably the most gigantic understatement in the history of the world.

Likewise, Mr. Oracle wins the coveted “Egon Prize” by ending his sentence with “which has highly inflationary implications”!!

And with that kind of inflationary horror waiting to befall us, now revealed as chillingly foretold in a Hollywood movie, you know that I am going to advise you to put down that slice of cold pizza that you are eating before one of the kids can get at it, and buy, buy, buy gold, silver and oil stocks, which are guaranteed to go up in price when the government is so bizarrely insane, like now, that it deficit-spends enormous amounts of new money – equal to a tenth of GDP! And more! – which is a massive amount of new money created by the loathsome Federal Reserve just for the purpose, all of which increases the money supply and makes prices go up, and up, and up, and which is the absolute Worst Thing That Can Happen (WTCH)!

Before you run screaming into the night, yelling, “We’re freaking doomed!” be calmed by remembering that by just buying gold, silver and oil, everything for you will be OK for you, and out of sheer amazement and gratitude, you, too, will whistle approvingly and say, “Whee! This investing stuff is easy!”

The Mogambo Guru
for The Daily Reckoning

Inflationary Understatement originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Inflationary Understatement




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Inflationary Understatement

September 20th, 2010

The Market Oracle newsletter jumps into the inflation-deflation debate, and says, “Debt deleveraging deflation completely ignores the fact that we are NOT living in the 1930’s, but in a globalised world economy that is seeing the convergence of real GDPs where the developing world is eating up the [world’s] resources at a faster pace then the west is cutting back on consumption.”

Something in my Puny Mogambo Brain (PMB) went, “Ding!” when I instantly recognized this as a classic case of the age-old supply/demand dynamic where price equilibrates demand with supply, in this case the increasing demand from the “developing world” is swamping demand from the “developed” world, meaning an increased demand, but with no mention of the physical supply of resources, which are hard to increase and are, in the short run at least, absolutely fixed.

So any increase in demand means pressure towards an increase in price.

As one would expect from the infallible demand/supply dynamic, when demand is going up when supply is not likewise going up, the market clears at higher prices, and Mr. Oracle seems to be in complete agreement with me on this, and says that increasing demand is “driving inflation higher whilst at the same time the west is engaged in competitive currency devaluations in an attempt to generate nominal GDP growth,” which is where I paused, as I fully expected him to accurately finish the sentence with “which is going to destroy the buying power of every one of those stupid currencies, including the dollar, which the Federal Reserve has destroyed with their insane neo-Keynesian econometric stupidities and outright frauds to create suicidal amounts of money, meaning suicidal amounts of inflation will destroy the people!”

Alas, he did not summarize it that way. Instead, the Market Oracle wins this week’s Mogambo Egon Spengler Prize (MESP), a coveted award named after the character played by Harold Ramis in the movie Ghostbusters who, when asked by the stupid little EPA investigator why the power to the containment grid should not be turned off, did not say, “Because it would release such unimaginable horrors that it would destroy us all in an unstoppable catastrophic disaster where the survivors would envy the dead, and would be unpaid slaves, cruelly treated with no salary, benefits or OSHA protections of any kind, toiling endlessly to please to a hideous demon that lives on the psychic energy of inflicting everlasting pain and suffering until the world is destroyed and every last one of us is dead after being painfully rendered asunder, tearing off your arms and legs, one after another, limb after limb!”

Instead, in a moment that will live forever as the Mogambo Egon Spengler Prize (MESP), Egon Spengler replied, deadpan, emotionless, looking right into the face of the EPA jerk, “Because it would be bad,” which is, if you have seen Ghostbusters, probably the most gigantic understatement in the history of the world.

Likewise, Mr. Oracle wins the coveted “Egon Prize” by ending his sentence with “which has highly inflationary implications”!!

And with that kind of inflationary horror waiting to befall us, now revealed as chillingly foretold in a Hollywood movie, you know that I am going to advise you to put down that slice of cold pizza that you are eating before one of the kids can get at it, and buy, buy, buy gold, silver and oil stocks, which are guaranteed to go up in price when the government is so bizarrely insane, like now, that it deficit-spends enormous amounts of new money – equal to a tenth of GDP! And more! – which is a massive amount of new money created by the loathsome Federal Reserve just for the purpose, all of which increases the money supply and makes prices go up, and up, and up, and which is the absolute Worst Thing That Can Happen (WTCH)!

Before you run screaming into the night, yelling, “We’re freaking doomed!” be calmed by remembering that by just buying gold, silver and oil, everything for you will be OK for you, and out of sheer amazement and gratitude, you, too, will whistle approvingly and say, “Whee! This investing stuff is easy!”

The Mogambo Guru
for The Daily Reckoning

Inflationary Understatement originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Inflationary Understatement




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Emerging Markets: More Than BRIC

September 20th, 2010

As the U.S. and most developed countries struggle to get out of the global recession, faster-growing emerging markets may be the answer to many questions.  When speaking of emerging international markets most automatically think of Brazil, Russia, India and China, the BRIC countries, but there are other opportunities to consider.

One such opportunity lies in Africa.  South Africa is known for its mining and production of precious metals and as long as the dollar remains weak and investors worry about inflation, precious metals will remain a hot commodity.  To further boost its appeal, South Africa’s government has implemented a spending restraint which has enabled its currency to remain relatively strong and its debt ratios favorable.  The International Monetary Fund (IMF) pegs South Africa’s debt-to-GDP ratio somewhere in the 35% to 40% range.  The easiest way to gain exposure to the nation is through the iShares MSCI South Africa Index ETF (EZA). 

Another opportunity lies in Eastern Europe in the emerging nation of Turkey.  Turkey is attractive because its consumer confidence levels are rising, it has a relatively young workforce, it boasts a thriving manufacturing sector and has an up and coming financial sector which is driven by an increase in consumer and business lending.  Additionally, Turkey is expected to expand 3.5% to 4% in 2010 and is expected to see an uptick in tourism which will be help generate revenue.  Lastly, Standard & Poor’s recently raised the nation’s long-term foreign currency and local currency credit ratings to BB and BB+, respectively.  Gaining exposure to Turkey can be done through the iShares MSCI Turkey Invest Mkt Index (TUR).

Mexico has undergone a huge fiscal face lift which is drawing attention as well.  The emerging nation recently recorded a record foreign currency reserve and an investment grade debt rating, helping the Mexican Peso gain a little ground against its counterparts.  Additionally, in the first quarter of 2010, the nation economy grew by 4%, which has been heavily driven by strong consumer demand.  Lastly, Mexican IPO activity is on the rise, with as many as six companies potentially going public this year- making the launches the first since 2008.  Mexico can be accessed through the iShares MSCI Mexico Investable Mkt Idx (EWW).

The last place to look is South Korea.  This Asian nation is attractive for many reasons.  First, it has heavy ties with China, so as China continues to remain a global economic powerhouse, South Korea will indirectly reap the benefits.  Secondly, South Korea’s central bank has painted a bright optimistic future for the country.  It anticipates exports to grow by 11.9%, private spending to jump by 4%, capital investment to soar by 13.4% and inflation to be a mere 2.6% for the year.  Lastly, there doesn’t seem to be any employment issues in the nation, as it is near full employment.  One thing that could put a damper on South Korea’s growth and prosperity are the political issues that have recently been unfolding between the nation and North Korea.  A possible play on South Korea is the iShares MSCI South Korea (EWY).

A notable mention which enables one to gain exposure to these markets without a specific county-focus, adding a bit more diversification is the Dow Jones Emerging Markets Composite Titan Index Fund (EEG).  EEG gives exposure to South Africa and Mexico, in addition to the BRIC nations.  

Although these nations and ETFs show several signs of prosperity, keep in mind that they come with inherent risks, lack of liquidity being one of the biggest.  Implementing an exit strategy, like one found at www.SmartStops.net can help mitigate these risks.

Disclosure: No Positions

Read more here:
Emerging Markets: More Than BRIC




HERE IS YOUR FOOTER

ETF, Uncategorized

Emerging Markets: More Than BRIC

September 20th, 2010

As the U.S. and most developed countries struggle to get out of the global recession, faster-growing emerging markets may be the answer to many questions.  When speaking of emerging international markets most automatically think of Brazil, Russia, India and China, the BRIC countries, but there are other opportunities to consider.

One such opportunity lies in Africa.  South Africa is known for its mining and production of precious metals and as long as the dollar remains weak and investors worry about inflation, precious metals will remain a hot commodity.  To further boost its appeal, South Africa’s government has implemented a spending restraint which has enabled its currency to remain relatively strong and its debt ratios favorable.  The International Monetary Fund (IMF) pegs South Africa’s debt-to-GDP ratio somewhere in the 35% to 40% range.  The easiest way to gain exposure to the nation is through the iShares MSCI South Africa Index ETF (EZA). 

Another opportunity lies in Eastern Europe in the emerging nation of Turkey.  Turkey is attractive because its consumer confidence levels are rising, it has a relatively young workforce, it boasts a thriving manufacturing sector and has an up and coming financial sector which is driven by an increase in consumer and business lending.  Additionally, Turkey is expected to expand 3.5% to 4% in 2010 and is expected to see an uptick in tourism which will be help generate revenue.  Lastly, Standard & Poor’s recently raised the nation’s long-term foreign currency and local currency credit ratings to BB and BB+, respectively.  Gaining exposure to Turkey can be done through the iShares MSCI Turkey Invest Mkt Index (TUR).

Mexico has undergone a huge fiscal face lift which is drawing attention as well.  The emerging nation recently recorded a record foreign currency reserve and an investment grade debt rating, helping the Mexican Peso gain a little ground against its counterparts.  Additionally, in the first quarter of 2010, the nation economy grew by 4%, which has been heavily driven by strong consumer demand.  Lastly, Mexican IPO activity is on the rise, with as many as six companies potentially going public this year- making the launches the first since 2008.  Mexico can be accessed through the iShares MSCI Mexico Investable Mkt Idx (EWW).

The last place to look is South Korea.  This Asian nation is attractive for many reasons.  First, it has heavy ties with China, so as China continues to remain a global economic powerhouse, South Korea will indirectly reap the benefits.  Secondly, South Korea’s central bank has painted a bright optimistic future for the country.  It anticipates exports to grow by 11.9%, private spending to jump by 4%, capital investment to soar by 13.4% and inflation to be a mere 2.6% for the year.  Lastly, there doesn’t seem to be any employment issues in the nation, as it is near full employment.  One thing that could put a damper on South Korea’s growth and prosperity are the political issues that have recently been unfolding between the nation and North Korea.  A possible play on South Korea is the iShares MSCI South Korea (EWY).

A notable mention which enables one to gain exposure to these markets without a specific county-focus, adding a bit more diversification is the Dow Jones Emerging Markets Composite Titan Index Fund (EEG).  EEG gives exposure to South Africa and Mexico, in addition to the BRIC nations.  

Although these nations and ETFs show several signs of prosperity, keep in mind that they come with inherent risks, lack of liquidity being one of the biggest.  Implementing an exit strategy, like one found at www.SmartStops.net can help mitigate these risks.

Disclosure: No Positions

Read more here:
Emerging Markets: More Than BRIC




HERE IS YOUR FOOTER

ETF, Uncategorized

How the Housing Recovery Affects Household Wealth Recovery

September 20th, 2010

Last Friday, the Dow Jones Industrial Average tacked on 13 points, boosting its gains for the week to 145 points…and its gains for the last three weeks to more than 600 points.

This modest rebound is a welcome relief, but we Americans are going to need a lot more weeks like these – a LOT more – if we are to recover the trillions of dollars we lost during the crisis of 2008-9.

According to calculations from the Federal Reserve, household wealth tumbled a whopping $17 trillion during the crisis – or about 27%. Since the depths of the crisis, however, Americans have recovered about $5 trillion of household wealth. Only $12 trillion to go!

American Household Wealth

For perspective, $12 trillion is nearly equal to one year’s US GDP. It’s not easy recovering that much wealth…especially not when the recovery operation relies heavily upon the housing market. Residential real estate accounts for 32 percent of household net worth; stocks account for a much smaller percentage. So household wealth can’t do a whole lot of recovering without a recovery in housing…and that’s not happening yet.

To the contrary, lenders repossessed a record 95,000 homes in August and issued 339,000 notices of default or other foreclosure-related warning. More than 2.3 million homes have been repossessed by lenders since the recession began in December 2007, according to RealtyTrac, while more than one million American households are likely to lose their homes to foreclosure this year.

Despite these daunting – and tragic – numbers, the folks who sip from the glass-half-full (of dreams and delusions) point out that notices of foreclosures “dipped” last month compared to one year earlier. This dip, they say is promising because it signals a drop in future foreclosures.

The only problem with this perspective is that it is false. The “dip” in foreclosure filings was no dip at all. Although filings declined year-over-year, they jumped 4% from July to August. That month-over-month increase is much more timely and relevant than the year-over-year decrease. The month-over-month number is the one that tells us about the trends that are now unfolding in the housing market.

Furthermore, it is important to remember that notices of default are like a five-course meal. They arrive in stages. Very few lending institutions possess the balance sheet strength to choke down their bad loans all at once. So instead, most banks take a few nibbles from their heaping plate of bad loans, pause to digest the losses, then they nibble again.

“It appears that lenders are allowing delinquencies to go on longer before they issue notices of default,” says RealtyTrac spokesman, Rick Sharga.

But these “delay and pray” tactics won’t make the future delinquencies go away. To the contrary, the foreclosure “kitchen” has many more courses to prepare before arriving out of ingredients.

“An incredible 14% of the nearly 54 million first liens in the country are now either delinquent or in default” the Real Estate Channel’s Keith Jurow, observes. “To come up with a total for the shadow inventory, let’s first add the total number of loans in default to those delinquent 90 days or more since we know that these loans are headed for foreclosure or a short sale. That comes to 4.5 million properties. Based on the cure rate for loans delinquent at least 60 days, we will add 95% of those 60-day delinquencies. That is an additional 723,000 residences. For the same reason, we will add 70% of those delinquent for at least 30 days – 1.25 million properties.

Mortgage Delinquencies

“And, of course, let’s not forget the REOs that have not yet been placed on MLS listings by the bank servicers,” Jurow continues. “We’ll be conservative and estimate them at 500,000.

“Adding all of these together, we come up with a total of roughly 6.97 million residences which are almost certainly going to be thrown onto the resale market as distressed properties at some point in the not-too-distant future. This massive number of homes will put enormous downward pressure on sale prices. To believe that prices are firming now is to completely ignore this shadow inventory. Ignore it at your own risk.”

Apparently, the “stimulus” measures coming out of the Obama Administration and the Federal Reserve aren’t doing as much stimulating as hoped. Apparently, if we may volunteer a simplistic deduction, sustainable economic growth derive from the private sector’s investment and production, not from the public sector’s bailouts and “make work” programs.

In other words, we Americans should not expect to recover our lost $12 trillion anytime soon, much less to increase our wealth beyond that figure.

Eric Fry
for The Daily Reckoning

How the Housing Recovery Affects Household Wealth Recovery originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
How the Housing Recovery Affects Household Wealth Recovery




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Real Estate, Uncategorized

An Aging America Gives This Stock at Least +20% Upside

September 20th, 2010

An Aging America Gives This Stock at Least +20% Upside

An important trend that will drive stock market returns in the coming decades is demographics. Simply put, the age of citizens across the world is advancing. In the United States, the first of the Baby Boom generation was born in 1946 and is in the process of retiring. Japan, Europe and many other countries also stand out for their aging workforces. [Read: 7 Countries that Could Crash in Five Years]

What better way for investors to play this trend than with firms that help aging people stay mobile and active? Thanks to more active lifestyles and, especially in the United States, a significant increase in obesity rates, joints begin to ache and the body literally begins to wear down after years of use. Aging individuals will need expert care to help them live longer, healthier lives.

Zimmer Holdings (NYSE: ZMH) is a compelling play on an aging America. A couple of firm-specific issues and overall stock market weakness have pushed the shares into the bargain bin, both on an absolute level and compared to its rivals.

I sat down with the investor relations team at Zimmer at an investment conference recently to learn more about the company and how it plans to overcome a number of issues that have held the stock back during the past couple of years. I also came away convinced that the company has addressed most of its issues and should see growth accelerate going forward.

First, a brief overview on the company: Last year, revenue reached $4.1 billion and the company sees its addressable market at about $30 billion. This consists of reconstructive surgeries, where Zimmer provides the knee, hip and related implant devices to either repair or replace areas around the joints.

Current stats show the company has the leading market share in knee replacements at 27% and the second largest share of hip replacements at 21%. It is also a major player in extremities (shoulders, elbows, etc.) and in dental, trauma and spine surgeries. Geographically, the Americas represented 57% of sales last year, with the United States leading the way in the region. Europe accounted for 29% and the Asia Pacific region 9%.

A couple of key issues have hurt Zimmer’s near-term operating performance. For starters, the global recession hurt the overall industry much more severely than Zimmer and other leading players could have imagined. Zimmer attributed this to the severity of the downturn and a plummet in demand from individuals that were still working and could not afford to take time off work out of fear they would lose their job.

Additionally, U.S. healthcare reform efforts have lowered industry visibility. Starting in 2013, medical device firms will be hit with excise taxes that will shave 2% to 3% off prices. Zimmer estimates this would have reduced the 2009 top line by $50 million, if the taxes were implemented today. The company plans to offset this lost revenue through cost cuts and expects to see some new revenue from the 30 million patients that reforms will bring into the system.

In terms of firm-specific issues, Zimmer lost some market share during the past couple of years as other regulatory issues changed the way the industry could work with surgeons. The company conceded that it could have communicated better with surgeons that generally stick with a single medical device firm out of familiarity for its products and procedures, but it pledges to increase spending and focus on regaining lost ground.

Despite these headwinds, Zimmer continues to throw off an impressive amount of cash flow. Free cash flow reached nearly $900 million last year, or more than $4 per diluted share. For the current full year period, the company projects a modest sales increase of between +3% and +5%, but an earnings jump of about +30% if it hits the high end of its guidance range of $4.15 to $4.35 per share.

Action to Take –> At a share price below $50, Zimmer is not discounting much future growth. The forward P/E is about 11.5, which is well below a five year average closer to 20. I wouldn’t expect as high a multiple going forward, but even a mid-teens P/E implies stock appreciation potential of at least +20%.

There is also considerable earnings upside as Zimmer regains market share and is able to ramp down sales, growth and acquisition spending to more historical levels. Throw in compelling demographic trends across the world, the end of industry uncertainty in the United States, and a coming upturn in the business cycle, and Zimmer remains one of the most compelling healthcare plays in the market.

– Ryan Fuhrmann

A graduate of the University of Wisconsin and the University of Texas, Ryan Fuhrmann, CFA, adheres to a value-based investing viewpoint that successful companies…

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