Leonesmoneymonitormonthly's Blog

By Edward Leone Jr. CFP RFC DMD MBA

Contact Information: edleonedds@gmail.com

The beat goes on as the world around us becomes more and more complex and violent. While the US economy seems to be on a steady but slow and gradual economic recovery, it appears that Europe is stagnant regarding economic advancement and Africa is suffering along with many Central American and South American countries. There are segments of the Asian economy that are showing growth. China is showing slower growth patterns. South Korea has been a magnet for economic growth and efficient production. It is apparent that they are beginning to experience the same dynamics which have burdened Japan for some 20 years now regarding population demographics and household debt.These conditions continue to create challenges for all of us regarding provision for life style expense and saving for education and retirement. Many do not give attention to planning for the unexpected. Insurance products, estate plans such as wills and trusts along with emergency cash savings are key elements in surviving such potential events.

One of the lifestyle expense challenges which is developing is the elevated cost of health care. According to a Robert Wood Johnson Foundation study, the trend regarding hospital consolidations and the merger of medical practices under this strategy in the health care industry is causing higher costs since entities are interested in improving bargaining power as they grow larger and negotiate with third party payers instead of creating enhanced and more efficient delivery of care. This is not good for the future and will only be corrected with capitalistic strategies which introduce reductions in receivables, pricing competitions, public awareness of what is available and what is necessary instead of what will my insurance pay. It would be most ideal for the consumer to have total control over benefit assets along with the decision process regarding what to buy and when for health care needs.

Regarding domestic issues, the Federal Reserve Bank has been a focus in resent weeks. It appears that the end of QE and the obvious increase in interest rates which will occur will be small and gradual over a period beginning in 2015 and extending into 2017 according to PIMCO. This means that those who desire to generate fixed income returns from investments will continue to be challenged, but equity markets are not likely to take a big hit in the near future. Equity investment are volatile in the short term, but according to an article in a recent issue of Bloomberg Business Week, investors lose more money trying to time equity markets rather than holding investments over a long time horizon. Jeremy Siegel of the University of Pennsylvania has done extensive research regarding this issue. His work is worth the read. Another issue facing investors has to do with the concept of developing a diversified portfolio. This can be a challenge depending on risk tolerance and the time horizon an individual has available. The guidance of a Certified Financial Planner in this effort is essential.

The election season is upon us. Many will be voting on local and national issues by mail in coming weeks. Let’s see what happens. Do not avoid your responsibility on this function.

For The Record:

DJIA 17,279.74

NASDAQ 4,593.43

S&P 500 2,010.40

Suggested Reading: “Knowledge and Power” By George Gilder

By Edward Leone Jr. DMD MBA RFC

Contact Information:

leonee@vzw.blackberry.net

     And the beat goes on. Hopefully we have all submitted our 1040 form for the 2010 year on time or filed for an extension. Conflict internationally is spreading to more muslim countries while the US Congress debates budget reductions, tax reform and the debt ceiling.  Along  with all of this, we have the revelation of the President’s birth certificate and the political comedy surrounding this issue. More and more it is becoming apparent that our government is on the verge of dysfunction in my opinion. Those whom we send to Washington D C to represent us seem to forget why they are there from time to time. Much of the problem with the Congress and the executive has to do with members’ focus. The main focus is raising money for reelection efforts. This activity goes on from day one in the life of a member of Congress and never seems to end. I wonder sometimes what is the difference between a contribution to my congressman and a bribe to a government official in China, Mexico or Afghanistan. The indebtedness that members of Congress and the executive have to donors has created a paralysis within the body and within the system. The main driver of the decisions made in the Congress is money. This causes much of what goes on there to be suspect in my opinion.  We are seeing this problem in real-time with the activities occurring as a result of labor unions’ influence on the Congress and state legislatures due to labors’ financial support of politicians. Politicians vote benefits to public union members without consideration for appropriate funding on a regular basis. This trend is very apparent given the financial condition of many government entities as a result of reduced revenue flows. The money is just not there to support these benefits and was not adequately provided from the institution of many of these benefit programs. Many individuals who counted on the integrity and reliability of their government employer, will be disappointed. The solution to this dynamic escapes me. Do any of you have a suggestion?

     I picked up on a study done by Fidelity which should interest every reader because you are near or at the age or have parents who are. Fidelity says that a 65-year-old couple will spend $230,000 in out-of-pocket healthcare costs into their future. 31% will go toward Medicare Part B and D premiums, 45% toward noncovered expenses and 24% for noncovered prescription expenses. If you have the time, prepare for this. If your family members cannot, help them.

     I find the rhetoric on alternative energy sources very entertaining sometimes. If we dedicate ourselves to focus on the facts, we will continue to have a realistic view of what is represented as economic benefit of a green future. Bloomberg News proudly pronounces that large photovoltaic projects will cost $1.45 a watt to build by 2020. This represents a 50% decline in costs  over current expense. The fact is that coal generated power costs 7 cents per kilowatt-hour while natural gas generation costs 6 cents per-kilowatt hour as compared to 22.3 cents per-killowatt hour for solar. It seems to me that we have a long way to go before solar is cost-effective even if the capital investment for installation decreases by 50% over the next ten years.

     I admit to the reader a very negative attitude toward government at present along with great criticism of public policy initiatives that are currently being generated, but do not apologize for such a posture. Part of the mission of this blog is to share information from sources which most readers do not usually access or even recognize in order to give a rounded prospective on the economic environment. Many of us are having a difficult time trying to plan future strategies for our personal economic well-being and for the prosperity of our business interests. Part of the problem is the misinformation from which most of us base our judgments and projections. I know that I promised to cover Social Security, retirement savings issues and insurance and bank savings products  and will do so in future writings, but this last piece for this blog was just too good to pass up or delay. Investopedia’s Financial Edge recently talked about the ” 5 Government Statistics You Can’t Trust”:

1. Unemployment—–The quoted rate is not accurate because it does not include those who are unemployed and so discourage with their failure to gain employment that they have stopped looking. This index is under reported.

2. Inflation—–The collection of goods on which price inflation is based continues to change. Current calculations take into consideration the substitution philosophy which states that as certain items get more expensive, people will substitute less expensive items. This clearly understates the true nature of inflation.

3. Gross domestic Product—–On the positive side, household work, volunteerism and the underground economy are not counted while on the negative side, the cost of crime and natural disasters is not counted. What does an accurate GDP look like?

4. Retail Sales—-This index follows dollar value of sales and not changes in unit volume. Therefore, inventory  turnover which is a driver for fabrication is a missing element. Increasing sales could just be a product of inflation.

5. Deficit Accounting—–The US Government uses a cash accounting system rather than the accrual accounting system used by businesses. The 2010 deficit was calculated as $1.3trillion under the cash system while if accrual under GAAP was used, it would be $2.1trillion. Deficits are clearly understated. Would you invest in a corporation that did its accounting this way?

It appears that economic reporting by government is not truly representative of actual conditions. Be critical! Ask questions and do you own analysis before taking action!!

For The Record:

DJIA                   12810.54

NASDQ               2873.54

S&P 500            1363.61

Suggested Reading:        “Race For Relevance” By Coerver and Byers

By  Edward Leone Jr. DMD MBA RFC

Contact Information

Dental                                www.leonedmddentalcare.com                              

Financial Planning       leonee@vzw.blackberry.net

One of the goals of this blog is to invite interactivity. There were two responses to the July blog sharing information and opinions.

Respondent one talked about DOW support at 9800 and the need for the economy to reset while the stimulus  has a temporary affect and added a trillion dollars to the national debt. Respondent one also shares opinions on the need to see solidarity in word-wide financial markets, good earnings numbers to effect investors thinking when it comes to investing in equities and reduced government spending while holding the line on taxes.

Respondent two is very concerned about the national debt and points out that 10% of tax revenues went to pay the interest on the debt in 2007-2008. This trend is likely to increase. He quotes Milton Friedman’s statement in which he recommends a monetary policy where the money supply is increased at a fixed rate ( gradual level) to avoid the detrimental effect on the value of the dollar caused by the many adjustments we are experiencing. He poses a question on the run up in national debt and whether or not we are at the point of no return.

What do you the readers think?

Peter Schiff, on Forbes.com, writes about austerity vs. stimulus stating that there is a shifting in philosophy within the industrialized world which has caused governments with long-standing liberal attitudes on accumulating debt to become austereians, as he calls them, while the capitalists are becoming more socialistic. Schiff points out that Greenspan explains that lower deficits will restore confidence, diminish the threat of inflation and allow savings to flow to private investment rather than public-sector consumption. While Krugman, a devout Keynesian, states that cutting government spending will force the economy back into recession. He feels that flooding the economy with money is the stimulus that will cause consumers to spend and improve economic conditions at which time spending cuts, tax increases and higher interest rates which are necessary corrective measures can be tolerated. 

Will we have more stimulus or better discipline in government spending? What do you think?

The Motley Fool’s Morgan Housel, thinks that with the winding down of federal stimulus efforts, an economic slow down is evident.

Ken Sweet on Yahoo Finance thinks that the obvious anti-business White House and the environment in credit and regulation it has created is perpetuating the lack of business activity and the stalled creation of employment opportunities.

Mr. Prechter, the promoter of the Elliot Wave Theory, thinks that we are in for a market decline which could be the worst in 300 years according to reporting in the New York  Times. He predicts that the DOW will fall to bellow 1,000 in the next five or six years with depression and inflation factors as a grand market cycle comes to an end. Prechter say that cash is the place to be.

I am not so sure that we are in for as much trouble as many may think. If one does the math, it is clear that within all style boxes (large cap value, large cap growth, mid-cap value, mid-cap growth, small cap value and small cap growth) price to book ratios are at bargain levels. The likely trend for stock prices may be up, but when? Will this movement occur due to changes in government policy or in spite of government policy?

Do-fundamentals-or emotions-drive the stock market? Goedhart, Koller and Wessels write in the McKinsey Quarterly that emotions can drive market behavior in a few short-lived situations, but fundamentals still rule.  Behavioral finance theory points out that investors have a tendency to project current conditions and recent events into the future as the absolute for future outcomes. They also follow systematic behavior patterns in buy and sell habits due to momentum observed and may over react or under react to market anomalies. These irrational behavior patterns are generally accommodated for in market pricing over relatively short periods of time according to efficient market theory. How many times have we heard, “but this time it’s different”? Well, we shall see.

During these troubled times,  households with reduced income streams are having trouble maintaining a reasonable budget. Financial planners use financial ratios as a guide to demonstrate to families where their budgets may be distorted. Volume 6, Issue 4 of the Journal of Personal Finance has a great review on this subject written by Harness, Chatterjee and Finke. These ratios are helpful in identifying financial stress.  Once a personal financial statement has been constructed, the following are some ratios for analysis which can be applied: liquid assets/monthly expenses, total assets/total debt, liquid assets/total debt, total assets/total debt. I am sure you get an idea of how this analysis can help a financial planner and a client discover the status and financial health of the household budget.

Personal households are not the only entities having budgetary problems. What happens when a city goes broke. This subject is explored by Jonas Elmerraji in the Financial Edge. Through out history, he points out that this event is a rather rare occurence since governments most usually have ways of restructuring themselves. The bankruptcy code does provide for this event however, under chapter 9. Most usually the following factors would cause consideration of a Chapter 9: mounting pension expenses, loss of key tax revenue sources and lawsuits related to non-performance on credit issues. Does any of this sound familiar within your community environment? Be very selective in chosing municipal bond investments!

Now that the President has signed financial reform legislation into law, we should spend a little time examining it’s content.  Much as is the case with health care reform, this is legislation spread out over many pages which contain a variety of directives, but little detail on regulations which are still to be established and written. There is a provision for a consumer protection agency under the control of the Federal Reserve Bank and funded by fees charged to banks. It will set rules to avoid unfair practices regarding the issuing of consumer loans and credit cards, but exempts the auto dealers. Consumers will have better access to credit scores and debit card swipe fees will be caped. Mortgage underwriting will be tightened such that incomes sources must be demonstrated and not just stated. Fixed-equity annuities are exempt from additional regulation. (Are we seeing a pattern here which demonstrates how our most powerful industries can lobby the Congress to get their way in many matters?) There are a variety of mandates on banks which will raise reserve requirements, give FDIC additional powers to break up the big guys if necessary and institute more strict auditing activities for the Federal Reserve Bank. Derivative and swap trading will be more transparent and credit rating agencies will be under scrutiny over how they formulate their ratings. There are also oversight provisions concerning compensation practices in the financial industry. I am disappointed that there is no iteration of adjustment in the operations of Freddie Mac and Fannie Mae. Oh well, the Congress has control there as we have witnessed over the past dozen or so years. They are so well-managed and the oversight has been so complete that the government has been forced to take over ownership of a significant level of their assets. Good job U S Congress!!

For The Record:

DOW                     10,465.94

NASDQ                 2,254.70

S&P 500              1,101.60

Suggested Reading:        “Buffettology” by Mary Buffett and David Clark

Leone’s Money Monitor Monthly for the Month of March 2010

     Hi all, my name is Ed Leone. I am a clinical practicing dentist over these last 38 years (need a dentist–go to leonedmddentalcare.com) who has been interested in financial matters for the greatest extent of my working career. In 2005, I earned a professional studies certificate in Financial Planning and in 2009 and MBA in Financial Planning. The purpose of this blog is to share information and ideas regarding our currency, politics, economics, investments and planning.  Your input, ideas and questions are welcome at leonee@vzw.blackberry.net.

     Let’s start with an examination of the key element in the title of this blog, “Money”. What is money and what does it mean to us. “The History of Money” written by Jack Weatherford, tell us that it is a medium of exchange. But it has several internal characteristics throughout history which we must also consider. Money should represent a store of wealth and be a unit of accounting in addition to its purpose as a medium of exchange. Commerce has existed though much of the history of civilization. For centuries, this commerce was conducted in the form of barter. As civilization became more productive and industrially specialized, other forms of exchange had to be developed which were easy to transport and recognized as a trusted form of compensation for goods and services offered. Our US currency was developed shortly after the revolution and separation from England. It has up until 1971, when President Richard Nixon and the US Congress removed the dollar from the gold standard, been back by silver and then gold as a store of  wealth. Since 1971, the expression of wealth behind the US dollar has been the government’s power to tax the citizens of our country. It is my opinion that since August of 1971, our legislative and executive branches of government have not been the disciplined stewards of our currency which they need to be. They appear on many issues to use political expediency in making fiscal judgements rather than economic principles which would benefit the economy and US citizens. From time to time, they look like the gang that can’t shoot straight. This behavior has cost us dearly in the form of the purchasing power of our currency and its value in the exchange markets for currencies of foreign governments over recent years.   

     If you had a dollar in 1972, it had a purchasing power of a little less that 20 cents in 2008. This means that your compensation had to be 5 times greater in 2008 than it was in 1972 in order to have the same purchasing power for both periods. Have you been able to keep up with this inflation factor? In 1971, US GDP was $1.2 trillion and in 2008, $14.3 trillion. It appears that economic growth has more than kept up with inflation. In 1971, the Federal Budget was $230 billion and in 2008, $2.9 trillion. Government expenditures have certainly kept up with inflation and expanded to a great extent beyond due to expansion of government programs. In 1971, the Federal Budget was 19% of GDP and in 2008, it was 20.3%. These numbers do not include deficit spending by government. This is clearly where budget discipline breaks down. It is so much easier to borrow or print money to satisfy approved programs than it is to reevaluate and prioritize them or institute tax increases on the citizens to cover these costs. How do we as the voting citizens of this country instil within our elected officials the need to be good stewards of our currency in order to avoid financial disaster as the future unfolds? Have we arrived given current financial conditions?

     For the record as of Feb 28th, 2010:

Dow                        10,325.26

NASDAQ                2,238.26

S&P 500                1,104.49

Suggested reading:  The History of Money by Jack Weatherford