Regulators and prosecutors playing with fire

From Preet Bharara, U.S. attorney in Manhattan --- "You can expect that before too long a significant financial institution will be charged with a felony or be made to plead guilty to a felony, where the conduct warrants it."  (NYT --- 4/30/14)

Comptroller of the Currency Thomas J. Curry "pointed to a federal law that requires him to hold a hearing about potentially terminating 'all rights, privileges, and franchises of the bank"(NYT --- 4/30/14), referring to JP Morgan if Bharara had forced the firm to admit to a crime related to Bernard Madoff.

At the moment Credit Suisse, a Swiss bank obviously, and BNP, France's largest bank, are in the crosshairs of Bharara, Eric Holder's Justice Department, and regulators, meaning the Federal Reserve and New York State.

This is really serious stuff.  In light of the success of Bharara and other prosecutors in digging up cavalier, speculative, and casual comments from the e-mails of mid-level employees at various firms under scrutiny, and then presenting those comments to "juries of one's peers" as indicative of the entire firm, financial institutions have been in the mode of settling as quickly as possible before the publicity gets too bad, the legal costs get too high, and the distraction from business as usual becomes disruptive to performance.

In their zeal to be seen as righteous protectors of the people prosecutors are way out on a limb.  If they do charge a firm with a crime, and unintentionally set in motion a series of events that causes that firm to shut down, we are potentially back in Lehman failure territory, meaning a financial catastrophe.  With the anti-bank scapegoating Obama administration having appointed most if not all of the regulators, we are in a situation that potentially has no checks and balances between regulators and prosecutors.  The Federal Reserve is perhaps the only rational player. 

In the case of major U.S. banks, many of the cases arise from firms acquired before 2008 or firms that were acquired in 2008 and 2009 at the request and under pressure from the U.S. Treasury.  In other words, firms are being sued for actions over which they had no control.  In the particular case of JP Morgan and the accusation of complicity with Madoff's ponzi scheme, most people familiar with the banking practice of servicing and processing transactions view JP Morgan's actions as completely legal and carrying no broad fiduciary responsibility.  Even the highly regarded and tough Manhattan Judge Jed Rakoff threw out of court Irving Picard's suit against JPM related to this, saying it had no merit.  Bharara tried again with a pending jury trial, and using that now tried and true method of relying on out of context and out of the line of real responsibility e-mails, he forced a settlement and thought seriously about forcing a felony admission.  There was no felony and it is questionable whether there was any wrongdoing according to the law, but why would the law stop Bharara, he's a prosecutor.

This is all troubling.  As to the two cases at hand, Credit Suisse's alleged offering of illegal tax shelters to Americans and BNP's  doing business with countries like Sudan that the U.S. had blacklisted should be handled with fines, not as crimes.  With BNP in particular, it is questionable whether any violation was intended, or was just inadvertant, incorrect, and incompetent routing of transfers through their U.S. subsidiary.  With Credit Suisse, a long established and to some a well known business practice came under more intense scrutiny as it should have, details of which are not known here.  Was it a renegade group within the firm or the firm's policy today?  I would guess the former but don't know for sure.

If either of these banks are charged with crimes and forced to shut down their U.S. business operations, or worse also cut off from all interactions with U.S. banks, this could be disaster for them.  On top of that it would be unwise for prosecutors to ignore the potential for payback by Swiss, French, and European regulators in general.  Unfortunately, who would suggest that Bharara, Holder, and their compatriots are wise.  Ambitious, beholden to vindictive interests with little insight, smart, all of these may characterize them, but wise, no.

Let's hope that it's not time to worry, and that their preening is not any more that a big, boastful self-adulating bluff.  Is it possible that they could really do something completely stupid?   

Davy Crockett

Last night I was in a continuing e-mail dialogue with a young adult who is learning to manage her investment portfolio.  She is smart, working on her understanding, and eager to learn more.  Her college background is in the humanities and her interest in business and financial markets had been, until the last year or two, limited and that may be an understatement.  She came of age during the great recession and that no doubt had an influence that led to a certain reticence to make investments.  Her risk profile could only be described today as under invested.

She wants to change that in a measured way, and I am working with her on that by incrementally giving her suggestions that she may choose to listen to or not.  She has individual stocks in her portfolio that were chosen by others when she was not of age.  She has some index funds and a variety of hybrid funds.  She has lots of liquidity.

My most recent suggestions have been to add a Total Market index fund to her portfolio and also a hybrid bond fund with proven good management.  Last but not least I have been encouraging her to make a few individual stock purchases based on her observations and experience, as well as taking a gander at the financials.  My early positions in Apple were based on her non-investment focused comments and the same can be said for an investment position in Lululemon, now departed but very profitable.

Using those examples, and following the Peter Lynch advice of invest in what you know, I have encouraged her to make a few choices.  I ended last night's e-mail on that subject with "Don't rush.  Feel right about it, but do go ahead."

Waking up early this morning I realized that I had been paraphrasing my early childhood hero Davy Crockett.  His famous dictum, simple and widely quoted, was "Be sure you are right, then go ahead", distinctly similar to the advice given here.

"Calculus"

"Calculus" --- from Webster's --- 1. an abnormal concretion, as a kidney stone  2. Math a. analysis or calculation using a special symbolic notation. b.  The combined mathematics of differential and integral calculus.

Yesterday, in comments as reported in an article by the New York Times, President Obama said, "The goal is not to go after Mr. Putin personally, the goal is to change his calculus."  Then in the article the reporter noted that "measures to date have not noticeably changed Mr. Putin's calculus".  Later in the article a Russia analyst at Eurasia group said that "To have a shot at changing Putin's calculus we've got to get serious on economic measures".

Of course we know what President Obama means, and how sophisticated we are.  There is no calculus involved here. This is an example of what often happens in business when a word is used incorrectly and then gains a cachet, or should I say traction, that leads to follow up by others.  One could wonder how this translates into other languages in our globalized world.  

"Otherwise Known as the Human Condition"

"Otherwise Known as the Human Condition" is a collection of essays and reviews written by Geoff Dyer from the late 1980's until 2009.  It was published in 2011 but somehow missed here, unusual since at least seven of his wide ranging books have been read here over the years and he is followed with interest.  No matter, it was a good find now, a smorgasbord of Dyer's writing to choose from.

 For the reader, the beauty of a book of essays like this is that one can pick and choose what to read and in what order.  There is no linear requirement.  This book is broken into five thematic sections: Visuals; Verbals; Musicals; Variables; and Personals.  The easiest reading and initially most interesting part of the book as read here was Personals, as that is a section of vignettes about Dyer's life.  Having followed him closely here as a writer,  still little was known about him except the basics.  In Personals, his life is laid out to some extent, his history, character, and quirks made clear, and his widely dispersed energy made transparent, or so it seems.

Variables is essentially essays that don't fit into a clear category, Visuals is focused for the most part on photography, Verbals on literature, and Musicals biased toward jazz but with an appearance by Def Leppard.

Everything written here is characterized by Dyer's searching generalist mind.  He basically has no limits to where his interests could range and has cut out an almost uniquely varied writing career for himself in fiction, non-fiction, and opinion on a wide variety of topics.  If he likes something, his attitude is that the best way to learn about it is to do research and write a book about it.  He was interested in photography so he wrote "The Ongoing Moment" even though he does not take photographs except for infrequent snaps of friends with a bare basics camera.  His first revelations about literature came from reading D.H. Lawrence so he wrote "Out of Sheer Rage", a tour de force on writing, literature, and a highly entertaining view of D. H. Lawrence as the centering theme.  He loves jazz, so he wrote "but beautiful", venturing only where "experts" on jazz dare to tread.  In all of this and in these essays, a precocious sense of humor pervades his writing style, subtle at times, evoking a spontaneous laugh at others.

As might be appropriate, the next to last essay in this book is "Otherwise Known as the Human Condition (with particular reference to Doughnut Plant doughnuts)" and if there is a Dyer world view, it is hidden in plain sight here.   

Attacking imbedded concentrations of stuff

Here I sit in what was referred to as the "computer room" for many years.  It would be referred to as a living room in general parlance but not here.  It has two large worktables, at one time had two computers, still has two printers, and also has my main desk for toiling over paperwork, bills, taxes, medical claims, and assorted organizational and filing purposes.  Ancillary to all of this in the "computer room" is a sofa, two reading chairs, two small bookcases, and a piano.

Just to my right as I sit here at the computer on one worktable is the other, and it is absolutely loaded with stuff, the detritus of my younger daughter's middle school, high school,  and, heck, maybe even her elementary school years.  There are markers, colored pencils, crayons, pens, pins, ribbons, beads, paper clips, staples, pencil sharpeners, souvenirs, small school projects, notebooks, electrical connections, compasses, emory boards, mouse pads, a tape measure, a level, scissors, hole punchers, rulers, multiple bottles of wite out, protractors, duct tape, hair clips, glue, erasers, calculators, index cards, flashlights, a book, a frisbee, and more, and it is the perfect example of an imbedded concentration of stuff.  Due to younger daughter's indifference and our timidity in dealing with this without her participation, the table has been sitting mostly untouched for maybe three years.  She is on an extended semester abroad plus follow up trips, so now is the time to act.  She will not mind at all in my estimation.

There are other imbedded concentrations around the house.  Closets in general are a ready culprit. There is the main television and sleepover room in the basement with its large IKEA bookshelf, replete with board games, card games, video cassettes, and books.  There are two corners of the so-called library room(due to a wall to wall bookshelf) in the basement and both are just full of stuff including my antiquated golf clubs, a child's golf club set, a foot locker full of photographs and junk from my pre-1980's era, and piles of folders from my various jobs.  There is a large walk in closet in the basement that is full of clothes, maybe two are three items belong to yours truly, and almost nothing in there is ever bothered.  There are pieces of furniture in the dining room, including K's desk, that could use significant attention due to stuff overload on their tops.  Then there are smaller concentrations that abound from room to room, sitting there like snipers waiting to divert.

The goal here is to begin to attack this stuff.  First up, in the best laid plans, is the worktable to my right.  If dealt with, it would be a wonderful place to serve as tax center of sorts, so piles of 2013, 2012, 2011, etc. tax documentation could be neatly assembled there rather than on the floor around my desk or in a file cabinet in the aforementioned library room which is not at all convenient. Tax season seems to be a never ending event.  The government has just sent a review of our 2012 taxes that is looking for lots more mullah and it is partially right, my accountant did inadvertently make an error and fail to include one broker's statement, but there are other items that are absolutely incorrect.  If I really did have an account at Citibank that earned $9000 of interest in 2012 I would love to find it as that would obviously translate into some serious change, but I have no Citi accounts, no Citi 1099's.  But there is my SS# and an account# in the IRS letter.  This will be a pain and that's an understatement.

But I digress.  "First up" is a possibility.  The problem is that when this "clean up major hot spots mood" hits, the mind can go a little manic.  That leads to trying to do too much at once which inevitably leads to completing no one task.  Discipline must be brought to this.  Don't walk into the basement to get the drain cleaner out of the furnace room and then stop to look at the board games.  Don't to into a closet anywhere in the house and start looking for things for charity, not yet.  One thing at a time I say to myself.  Only discipline will allow anything to get accomplished.

Crossing my fingers.

Unelected 39 year old suggests WWIII

Arseniy Yatsenyuk, the unelected interim prime minister of Ukraine, made widely reported public statements today suggesting that any military conflict in Ukraine will lead to a broader military conflict in Europe and, and that Russia wants to start WWIII.  Does he think this will make Europe and the U.S. more likely to support his every move?  If so he's probably mistaken.  Everyone wants to get away from him now, although they would not compound his faux pas by saying so. 

In what way did he think that these comments would help the situation at all in his country, in the region, and in the world.  Since he has little credibility outside of the some areas of his country there is probably no harm done, but what was he thinking.  Doesn't he realize that he is being humored by the West and tolerated by his own citizens because everyone sees him in an interim role until the scheduled May 25th elections.  His role is to make it through this "interim" with as little fanfare as possible.  He did not know that?

Understanding his role could have been made more difficult by Vice President Biden's triumphant visit to Kiev last week, with his big smile, waves, and ability to jog down the steps of the Air Force plane just like President Obama.  Biden did not to seem to be in touch with an appropriate tone for the visit.  Something very serious is going on here, but the 71 year old Biden seemed to be in a glowing pep rally mode.  Why would 39 year old Yatsenyuk see the need to restrain himself after that example.

We needed a light moment, and one could hope that we get more opportunities.  The outlook now is not so good.

The Jimi Hendrix forever stamp

The Jimi Hendrix forever U.S. postage stamp was purchased here with little thought and with hardly a glance while at the local post office.  It was Jimi Hendrix, the brief thought went, and those stamps should unequivocally be in the desk drawer along with the flowers, flags, and cars already there at the moment.

Later, at home, I looked at it closely.  Then I mulled it over for a few days.  And it became clear that I really did not like this stamp.  Who designed it, J. Edgar Hoover?  The reddish lips, the Shiva like hair, the closed eyes, and the ugly greenish purplish background that must be meant to be viewed as psychedelic.  This stamp is a hideous remembrance of one of the greatest guitar players ever.  It is not only insulting, it is ugly.

Jimi Hendrix is remembered with, but is not defined by, the counter culture.  He was first and foremost a musician, songwriter, and a bluesman.  When the jazzman John Coltrane played "My Favorite Things" and then went to places unimaginable, he was no less a jazzman, and when bluesman Jimi played the "Star Spangled Banner" and then went to places previously unheard of, he was no less a bluesman.  To take a genre to a fully unexpected place, to extrapolate on themes that are unfamiliar to most, does not take away the origin of the brilliance.  To someone in the U.S. Postal Service or U.S. Government, that does not seem to be their take on things.

To see Jimi Hendrix perform was an awe inspiring experience, or as his first album asked "Are You Experienced".  It was mesmerizing and evolved from note to note in ways that were stunning and unexpected.  This stamp is not experienced.  It is all introspection and isolation.  It has nothing to do with Jimi Hendrix.

Hendrix was so innovative and powerful that he could cover other people's great work and make them into something new, soulfully doing so, thinking here "Sgt. Pepper's Lonely Heart's Club Band" and "All Along the Watchtower" as spine tingling examples.

The Post Office's soulless and thoughtless stamp is just sad.  

"Waiting for a Train" with Toshio Hirano

As a added treat on Monday night's PBS independent lens series showing of the Muscle Shoals film(previous post), it was followed by a "short".  That was a time warp.  Was I back in Danville circa 1959 at the Rialto on lower Main Street, hanging on for a "short".  What about cartoons beforehand. 

The 20 minute film was "Waiting for a Train" and it was more or less the adult life story of Toshio Hirano, a player and devotee of pure country music.  Growing up in Japan he was always into music, especially country music, which he thought at first was something like the Kingston Trio.  An avid record collector, he found bluegrass at some point and couldn't believe what he was hearing, both the sound of the banjo and the violin that made such strange sounds.

He made a trip to America to hear more varieties of the music, was hooked, and came back a few years later, in the early 1970's, to cover much of the country on a bike with a guitar on his back and his possessions somewhere, not sure how he did that.  He rode and must have performed.  He was astonished at West Virginia and went further south, then somehow ended up in Minneapolis for three or four years, a hotbed of country?  Then on for a period of time to Texas.  He finally ended up in San Francisco, got married, they had two children, and he continued playing his favorite song most nights, Jimmie Roger's "Waiting for a Train".

While I'm sure that he went back to Japan from time to time as he must have come from some means to accomplish all of this, he never went back to live, and remains in the bay area.

Rarely, if ever, is a film or book laid out here in detail like this.  But this was a "short", so in this instance the joy is all in seeing and listening to Toshio and feeling his pure exuberance for the music and his life.  The short film may be able to be found on Google or YouTube.   


 

"Muscle Shoals", a historical documentary about the rhythm and blues mecca

Last night on PBS's "Independent Lens" series, this film was watched here.  It's about the development of the small town of Muscle Shoals, Alabama(pop. 12,000) into a center of the R&B recording industry.  It was worth almost every minute.  Beginning in the early 1960's this town began what might be seen as an unlikely rise in the recording industry.  The story will not be told here, it's for you to find and watch, but what follows are few highlights of what a determined producer and five "greasy" white 19 and 20 year old band guys were able to spawn, all locals of the small town and its rural surroundings.

---Local Percy Sledge's great hit(When a Man Loves a Woman) was his first recording. The film has footage of the creation of the song in the studio and its rapid ascent to the number one song in the country if not the world.

---Both Wilson Pickett and Aretha Franklin recorded most if not all of their major 60's hits with the Muscle Shoals band.  Who would have guessed that the Queen of Soul had an all white band or that the bravado Pickett was backed by the same group.  The clips of Aretha Franklin developing her own unique style in the studio are special.  Same for those of Wilson Pickett coming into town with a chip on his shoulder and developing a close musical relationship with the studio musicians.

---There is almost impossibly good footage of the Rolling Stones short visit to a studio there, a time in which they got four songs in the can in two days, including Wild Horses and Brown Sugar.  In a current interview, Keith Richards noted that the accomplishment was not at all normal for them.

Writing any kind of commentary that can really capture this film is something that I am failing to do.  There is too much there.  Keith Richards, Mick Jagger, Aretha Franklin, Percy Sledge, Stevie Winwood,  and many others are all there in current interviews.  One inexplicable person included in several short interviews is Bono, who never recorded there and makes at least one glib predictable comment about the civil rights struggle. That was a false note here, as in "you weren't there Man".  I guess he will help with broader distribution.  There was another short part of the film that was annoying here, and I'll let the readers find it if they can.  They may well not share my view.

The first hour and fifteen minutes of the film are over the top exceptional.  The last thirty minutes of the film mellows down, as musicians from all over flock to Muscle Shoals, many of whom are more mainstream and need their badge of honor.  That does not detract from the film at all, as it is part of a remarkable story.   

  

Seems like it's time to get back to posting

What better thing to write about when the muse, however muddled, has gone quiet?  You've got it, and the answer is thoughts on the equity market.  Now that's an area where the field is always wide open.

This is a market today which scares everyone but which no one wants to leave.  Where to go?  After some of the retrenchment in recent weeks, modest with any perspective, is this the time to pick up a few bargains, join an upswing, or is this the time to trim positions before another dip.  There are no answers here, other than stay the course, stay diversified, and buy and sell based on company specifics, sector opinions, or your choice of indexes.

There is one nagging thought here, one that is of concern.  That starts with what one could think is the "fact" that this market has no strong conviction.  Usually that can be positive.  Right now, with the Ukraine debacle being managed by the unpredictable Putin(I would say predictable), there could be ominous events on the horizon.  Then, if someone does something of real concern, the markets could be, would be, shaken.

One could envision Putin saying to himself, "they've put these economic sanctions on us and limitations on some of our economic interactions even as our economy is already under pressure.  Then, I'll show them, and do something that really shakes up their markets.  My army is being fueled by nationalism, is well trained and ready to go to it, while the U.S has military fatigue.  Ukraine is of no strategic interest to the U.S. and they are not part of any NATO treaty.  Europe has no heart in becoming involved in any military action, and one could not expect the U.S. to react in an unexpectedly rash way to an invasion of Ukraine by my forces.  Maybe they would just send long face to see us." 

How will this play out?  For now we can only focus on this week's first quarter earnings reports.

"Nebraska" and "Osage County"

These two films are bookends.  Amazing acting is combined with stories that are not told too much these days and create something that is almost hard to watch.

North Korea on PBS

Last night on PBS, after the Dave Clark Five program, there was a program purportedly giving an insider's view of North Korea.  It was for the most part useless, showing the same "hidden" footage over and over again.  What is known here is known at PBS.  Chubby cheeks is extremely dangerous.

Ukraine again

As said here previously, Putin will invade eastern Ukraine, and NATO and the U.S. have no answer.  Putin does not care about economic sanctions when he has broad Russian nationalism to fall back on.  His raising of pensions and unemployment pay in Crimea to Russian standards, not so great but much better than Ukraine's, set the regional economic bias for change.  Sit back for more of Obama and Kerry rhetoric.  They have no choice at this point.  Earlier backbone would have been better.

"Dave Clark Five, Glad All Over"

We stumbled upon this "Masterpiece Performance" two hour film tonight on PBS, and it was exceptional.  Those times resonated here for obvious reasons.  Never a real big Dave Clark Five fan, the music was still a set part of the background for an era, or more was a bridge from one era to the next, that bridge crossed clearly by The Beatles and unequivocally by the Rolling Stones.

Who knew that the DC5 sold more than 100 million albums in their six years of longevity, if it can be called that.  Who knew that they had the fan hysteria of the Beatles or the Rolling Stones as they toured the U.S., who knew that their sound was fundamentally influential to Bruce Springsteen and his band, Elton John, or to many others to this day.  And who knew that tonight there is no Dave Clark Five CD retrospective available on Amazon except for exorbitant third party seller charges.  DC5 almost doesn't exist in current consciousness, and this program was fascinating.

Their music was created to awe one with great sounds and to make the listener feel good.  Hear that snare.  Did that tonight.

'Thump, thump, thump, thump, Glad..."

Kentucky vs. Connecticut coming up next

The final game is finally here.  Two upstart teams that are playing their finest basketball of the season face each other in what could be a back and forth game.

It hasn't been a long college basketball season here but the last two weeks have been enjoyed.  K said she wishes it could continue because "you have been more yourself" when watching the games, and I guess that means more animated and engaged than has been the case recently.

No commentary here or predictions are forthcoming.  Just dealing with the important choice of whether to watch in the den or in our bedroom and which would be the best chair for putting the feet up and relaxing, and whether being near the kitchen should be factored into the decision.

Here's hoping for a close and exciting game that gives us something to talk about.  I like both teams, if that's allowed.


Postscript at halftime:  are the announcers even watching this great game?  too close to call?  Connecticut looks like it can go the distance.  Can Kentucky suck it up and surprise again?

Equities taking a break

U.S. equities continued their fall that began with last week's tough Friday.  Today's follow up was more of the same, with names in many formerly strong sectors slumping and names that have just individually excelled in any area over the last year taking it on the chin.  Raising the same question that was raised here a week or two ago, is this a rush to liquidity after a sustained run up, is it reflecting new valuation parameters that are more conservative or some might say more rational, or is it primarily a dousing of the fires that have been leading many tech and biotech companies to blast off into the stratosphere.

Investors are surely mulling this over tonight.  When do we jump in and bottom fish?  When is it time to put what has been idle money to work, taking advantage of a retreat to get into the market?  Or the question that no one wants to face, when do we sell, take gains, and wait for a better day?

Broadly speaking one could see experienced investors being copacetic at this point, having a "we've seen this before perspective".  The action required is to stay put and look for opportunities while lightening positions that were maintained for their momentum or cachet but whose valuations are questionable.  It is not a dire situation at all and may be a healthy one, allowing the market to catch its breath and setting the stage for investors on the sidelines to come in and give the market more breadth.  To those investors who can sleep well while maintaining their composure, more power to them.  This turn is only two days long, admittedly long days.

Most investors want to feel this way, meaning stay in and be opportunistic.  The overriding fear is one of the bottom dropping out of the market.  That's a rapid untradable decline.  This possibility, however remote, haunts many investors, especially those without a steady flow of liquidity or with a short time horizon for investment returns.

At the moment this does not look like a market that will shoot back up again in the near term.  Something more fundamental seems to be going on.  Is it a meaningful across the board valuation adjustment, or is there a bigger unknown on the horizon.  Given geopolitical events and important country specific challenges, take your pick, there could be a perspective creeping into the market that is not so optimistic.

Stepping back, there has been no recent change of economic data that would have been a harbinger for this decline. This has been a market driven, not news driven, two day decline. Tomorrow brings more information.   

Infrastructure spending in long term decline relative to GDP

What follows are the highlights of various government spending levels, as a percent of GDP, focused on building sustainable and constructive growth in the economy.  The numbers, not the words, are from a research report written by a major private bank.  The numbers that follow are estimates from imprecise graphs so may be off by a fraction of GDP or off slightly as to the exact time.

---Transportation spending, defined as spending on navigation facilities, airport construction, next generation satellites, high speed rail, urban bus, subway and rail systems; and the national highway system among other projects, was 0.70% of GDP in 1977 and 0.72% of GDP in 1981.  Those were the high points over the last 50 years.  After a steady and slightly erratic decline today's spending is approximately 0.38% of GDP and in 2017 it is projected to be 0.31% of GDP based on current plans and appropriations.

---Natural Resources and Environment Spending, defined as spending on dams, canals, rivers, flood protection, hydropower, deep water ports, air and water quality R&D, the EPA Superfund program, and other related projects peaked at 0.54% of GDP in 1977 and 1982, is now at 0.24% of GDP, and is projected to be at 0.19% in 2017.

---Training, employment and social services programs, defined as job training, dislocation programs, providing certification in machining, welding, masonry, electrical, firefighting, and other trades, and vocational and apprenticeship programs for youths aged 16 - 24, peaked in 1978 at 0.57% of GDP, is at 0.14% of GDP today and is projected to be at 0.06% of GDP in 2017.

---Energy spending, defined as renewable energy integration,  SmartGrid research, energy efficiency research, R&D energy projects with the private sector, among other projects, peaked at 0.34% of GDP in 1982 and now is at 0.08% of GDP and is projected to be at 0.04% in 2017.

Other important spending levels which can have a large impact on all of the above are:

---Defense spending, which peaked 9% of GDP in 1962 and again in 1970, now is at 4% of GDP, and is currently projected to be at 2.5% of GDP in 2017. (current events suggest that this 2017 estimate could go up)

---Entitlement spending, which at the beginning of the related chart was at 4.5% of GDP in 1973, now is at 9.6% of GDP and is projected to be at 10.5% of GDP in 2018. (what is included in entitlement spending is not detailed in any way, but if it includes social security which has been funded by individual and employer contributions to a trust, that is a subject of considerable debate)

All of the above can be interpreted as one sees fit.  Here it is obvious that the first four categories are in a significant decline as a percentage of GDP from the not too distant past.  These are the attributes that lay the groundwork for future economic growth.  Private enterprise could possibly be replacing a small portion of the spending that these declines suggest, but these are primarily public spending projects that have waned in financial support.  What this could mean is that without this investment in economic growth, the rise in entitlement spending will continue unabated.  Should I have begun the last sentence with "What this will mean..."

The facts, which should be startling and disturbing, are open to interpretation but cannot be ignored.

Friday equity market wipe-out, ephemeral maybe but definitely getting attention

On Thursday there was a post here that began with the sentence, "It feels like the U.S. equity market wants to go down".  On Friday it did drop decisively after a firm start in the early morning.  Heck, jinxing the markets was not the purpose of the day before comment here.  One should note, however, that for the week the Dow and the S&P were still up modestly, while the Nasdaq was down a mere 0.7%.

It has been mentioned in almost all analyses of Friday's carnage that most of the hardest hit were high flyers, harking back to the days of momentum stocks.  Biotech, social media, and tech titans fell victim to a defensive profit taking sell-off.  It's not that simple as I survey stocks followed closely here.  Some transportation names that had been on a run for the last year backed off substantially and credit card processors like Visa took a notable whack.

Among tech stocks the mighty Google stood out with almost 5% losses in Goog and Googl.  Here it is believed that many investors don't fully appreciate the purpose of the split into a new class of shares.  What is not understood is generally not bought.  Facebook has been on a several week leak of market cap after yet another full price acquisition.  Yahoo's comeback from the dead is now reeling as the allure of a sustainable turnaround by management brilliance is questioned.  Linkedin and Twitter backtracked from significant gains in 2014, while Apple continues its Rodney Dangerfield impression, "can't get no respect".  Those are the low points of yesterday, but there was really no place to hide.

One could guess that the book promotion crusade by Michael Lewis has shaken the market faith of some, particularly retail investors.  Even institutional investors that may know more than Lewis about high frequency trading could pause as they consider the repercussions of this avalanche of coverage of his new book that proclaims that ''the stock market is rigged".  Lewis led off his time on "60 Minutes" this past Sunday with that comment, dramatically presented several times by CBS.  The New York Times is fawning over Lewis as well, with a major excerpt from the book in this Sunday's Times Magazine plus other articles and op-ed pieces that make for major coverage.  Then all of that hoopla was followed yesterday by Eric Holder making sure everyone knew that the Justice Department was examining the practice.  When does a popular book writer elicit such a gratuitous government response.

With the general investing population, aka retail, still skeptical of the financial system after events of the last five years and a President who cannot criticize the private financial system enough, this does not help with confidence and gives know-it-alls on the right and left a new soapbox to stand on.  This brouhaha should pass as parts of Lewis's book are exaggerated and those institutional "lead steers" of the market know it.  That Lewis has provided de facto encouragement to retail investors to lock in their economic losses in bonds and money market funds with his frenzy of self promotion is unfortunate.  Lewis is a clever guy and a talented writer, but this is not his finest moment.

Next week will be interesting and may start out slow, or even as a continuation of Friday's negative trend at first, but buyers should be waiting to make a move at some point.    

NYT article on long term unemployment is odd

We all know that long term unemployment is a problem in this country, as the longer without work the less sparkling one's resume becomes, the knowledge base in this technology driven economy begins to stagnate, and long term networks of contacts begin to diminish.  The lead business section article in the NYT today was "Long Out of Work, and Running Out of Options".

It's a topic well worth covering.  The odd thing about the article is that the journalist chose as his main example someone whose story doesn't add up.  The 57 year old gentleman "lost his position at a large marketing firm last March" and is looking for other jobs in his field but has not found anything yet.  He has an undergraduate degree from an Ivy League school and an MBA from the University of Chicago.  Now he scrappily works three part time jobs to stay afloat and provide for his wife and children who he "struggles to support".

One year of unemployment and he has difficulty meeting his mortgage payments, has built up credit card debt, "wiped out his retirement accounts and has even contemplated selling his house".  How did this highly educated former manager who is lauded in the article for his extensive experience in marketing across the business spectrum, from start-up firms to large financial institutions, end up in this predicament so quickly?

Were he and his family big spenders who lived beyond their means?  Did they have zero savings?  Was he a corporate hanger-on who avoided risk and was not successful enough to have an especially good job, his skill being blending in with others rather than the upward climb that his seniority and background would suggest?  The point here is that great recession or no great recession, higher unemployment levels or not, this gentleman may not have been on the right path.  He eventually could have been laid off in any scenario and his resume and his recommendations might reflect that to some degree.

He received unemployment benefits from March through December, and now is without them.  He is in a tough situation that one can certainly sympathize with.  How he got into this position is unclear, and makes the journalist's choice to make him the face of the article questionable.  There is something missing here.  Is he a relative or friend of the journalist who provided a ready story?  Who knows, but so many better choices must definitely be out there that would highlight the long term unemployment trap much more poignantly.      

U.S. equity market in tug of war, or what's new?

It feels like the U.S. equity market wants to go down. It could be said that its run has continued through too much volatility.  Much of that recent volatility is focused on the Nasdaq, which has an array of individual stocks that are retreating, while some are maintaining, no broad brush there.  Small caps are no longer leading.  Big cap dividend stocks are sputtering.  What's to make of this market.

There are the indexers who sit and watch, unconcerned as their focus is the long term experience of riding with the markets being ultimately positive, more positive than most stock picking is their perspective.

Then there are the institutional stock pickers who still, one thinks, price the market.  Following that are the part of the retail market with decent sized equity portfolios who do not price the market but provide momentum in the aggregate, in one direction or the other.  Most of these discretionary players, institutional and individual, seem to be in flux at the moment.

On February 19th there was a post here entitled "The Coming Equity Market Surge" and that basic idea still resonates as a possibility for the second half of 2014.  More money flowing into equities, out of close to no-yielding deposits, and a resurgence in corporate profits as underlying strengths in housing, real estate, and exporters shows through, could be the scenario.  That could happen.  On the other hand there is the concern that the balloon may have popped in biotech and that the M&A resurgence in the technology sector is often a zero sum game for investors, right place right time for some, a big drag for others.

The bet here is to stay standing firm, but with some profit taking around the edges.  If a stock is up 200% or more since acquisition a few years ago, one could just take a gain on some portion(Netflix for example up much more than that) and build a capital gains reserve to cover any losses elsewhere in a negative scenario as well as more cash for other opportunities, or for that matter next year's college payments.

Staying engaged, staying safe, and keeping a cushion are the goals.  Who's kidding whom?  Having been through the 1987 crash, 1991 recessionary downturn, the 1997 Asian currency debacle, the 1998 LTCM provoked global credit crisis, the internet stock bust of 2001, and the collapse of 2008-2009 that led to the so-called "great recession", we know that market events are unpredictable, unsettling, and happen with great speed.

Beware any all-knowing pundits. 

 

 

"The Hunger Games", the film

Prior to recent days there had never been the slightest inclination here to see the film "Hunger Games".  The attraction was that it did star Jennifer Lawrence as the lead, a big deal as it was written by some reviewers that she belied the accepted belief held by some that a woman could not be a compelling enough star in this type of action film and lead it to record gross sales.  She did.  Many say that her performance outshone that of Robert Downey Jr. in Iron Man 2, for what that is worth, apparently quite a lot.

That was one reason to order the film from Netflix.  The second was that K really likes this type of film, futuristic action packed movies that could be called comic book adventure style.

Lawrence's roles in "Winter's Bone", "Silver Linings Playbook", and "American Hustle" were all enjoyed/admired here.  A part of the fascination is that Lawrence grew up in an area of Louisville that this writer once inhabited and thrived in.  That was a time long before Lawrence was born, but that's an opportunity for identification it seems.  Why that "connection" means anything is unclear, just human nature I guess.

In this season of dystopia in the book world this film from 2012, written as a novel focused on teens and young adult readers in 2008, fit in perfectly with familiar themes.  In a futuristic world that had survived some sort of rebellion and disaster, the country described had morphed into a totalitarian government run by sadistic tyrants who divided their country into 12 districts, with district one being the extremely privileged in a brilliant city and moving up to district 12 which was coal mining territory, a rural West Virginia of the future.  The hunger games were an annual ritual of titillation for the wealthy and oppression for the lower classes.  Even though everyone but this writer probably knew the story already, no spoilers or detailing of the plot will be forthcoming in this comment.

While pure entertainment for the most part, "The Hunger Games" is not immune from being taken metaphorically, which it is certain that the active minds of many young people who flocked to the film liberally did.  If perhaps not thought provoking for some, there was a well made story to watch plus the additional treat of listening to a T Bone Burnett soundtrack.

It was surprising here that the film seemed easily worth watching so "Hunger Games, Catching Fire", the sequel, will be in the mail from Netflix in a few days.  We look forward to it.

Medicare Part B's income adjusted premium

This is where the haircut begins for those in the top half of the middle class.  Medicare Part B has an income adjusted premium that can range from the base of $104 a month to a high of $336 a month.  All participants have already paid in their income based Medicare taxed amount to the government over time, but some, in fact for the most part those who have already paid by far the most, now get to pay much more than others for the coverage.  Is there a question of fairness here, or one could ask if the Federal government is just grabbing money anywhere that the defenses are limited. The additional cost is of course not adjusted on a cost of living basis, a pet peeve here that will never change.

Over time we will see manifestations of this surcharge approach that will be related to other benefits.  It is likely that social security will eventually be subject to an income adjusted reduction or one based on total assets that a recipient has at their disposal.  This will happen regardless of the administration at the time, as Democrats will leap at any opportunity to raise taxes on those who have been reasonably successful and since Republicans see their main job as protecting the top half of the upper class that will cry but the overall impact on their well being will be negligible.  Despite their protestations, Republicans do not really focus on the middle class.

If this happens, and it is presumed here that it will, it again raises the question of fairness, in particular because social security was always described as a trust fund concept, not a taxation one.  Cost of living adjustment, blah, blah, blah...

Those that are poor will also continue to see pressure as they have so recently in the SNAP program, aka food stamps.  One can easily question whether all food stamp participants are those that should qualify or whether the program provides a disincentive to family creation and productive on the books work.  At the same time one could choose to also question the amount of tax relief given to hedge fund managers and private equity investors in the form of what is called "carried interest" for some reason.  It means that their earned income is taxed at lower capital gains rates rather than at income tax rates.  The cost of this subsidy for certain wealthy investors is far greater than any leakage around the edges of the food stamp program, so get a life you self righteous ones who whine about food stamps.  Food should be close to a basic right for a country as prosperous as the U.S A.