Leonesmoneymonitormonthly's Blog

By Edward Leone Jr. DMD MBA RFC

Contact Information:

leonee@vzw.blackberry.net

     What a crazy time it is around the globe. There is more conflict, strife and human suffering occurring at this time than in recent years based on the news reports we are hearing and viewing. It is difficult to know what exactly is going on and what exact action needs to be engaged on each of the issues facing us. I fault the news media for speculating and not reporting accurately the conditions in the Middle East, Japan, Africa and our own US with its social and budget problems. There is much for us to know, but access to information that is useful in understanding the challenges is difficult to obtain or just not available. It is my sincere hope that as the future months unfold most of what we are experiencing is resolved in a positive fashion.

     One of the more entertaining reports I viewed in Bloomberg Businessweek recently has to do with the new alphabet soup which has been generated by new legislation promulgated by the Congress:

DFA  Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

CFPB Consumer Financial Protection Bureau

FSOC Financial Stability Oversight Council

OFR   Office of Financial Reasearch

SEF    Swap Execution Facility

MSP   Major Swap Participant

FIO   Federal Insurance Office

CFI   Complex Financial Institutions Office

OCR  Office of Credit Ratings.

I hope this dictionary of acronyms is helpful to you in your reading in the future. A focus on DFA is appropriate in that it contains provisions for what are known as “Clawback Policies”. These policies permit companies to recover erroneously awarded compensation from executive officers. It seems to me that establishing erroneous status would be difficult unless there is solid proof after an audit or financial restatement. It appears that there is also a code of ethics to be applied here. That is a good thing if the code is clearly defined and not again a matter of arbitrary interpretation. I can see many CEOs challenged in their good work and many lawyers making a bundle on questionable accusations against corporate officers if claw back is ill defined and obused.

     One other acronym which is known to all of us deserves some attention due to changes in the IRC (Internal Revenue Code). I am talking about the IRS. Some of you may find benefit in the following list of code changes:

Roth IRA rollovers no longer restricted

Income from Roth rollover can be spread out

Limits on personal exemptions and itemized deductions ended

Personal casualty and theft loss limit reduced

Corrosive drywall damage repairs deductible

Homebuyers credit

Adoption credit

Gifts to charities deductions.

Please work with a qualified accountant to determine your tax obligations or benefits as a result of this partial list of code changes. It may very well be that some of you will receive a letter from the IRS in the near future regarding the inability for IRS computer systems to complete document matching on your tax return. It is important that we avoid a situation where all income is not reported. The purpose of the document matching policy is to identify returns which have misstated information. If you are subject to one of these inquiries, respond promptly and involve you professional tax preparer immediately.

     Another area of concern for all who operate a business revolves around the issue of benefits and the employee understanding of those benefits and how to use them. There is no positive effect on employee recruitment, retention and productivity unless these benefits are understood and used. I had such a situation recently in my own business in dealing with a patient. The positive effect upon the attitude of this individual once the benefit package was explained by my staff, understood and applied to her situation was remarkable. Whether you are on the providing side or the receiving side of work place benefits, be sure communication and education is a part of the work place atmosphere.

     In considering our own efforts at developing retirement benefits, we must realize that the decade immediately past was one of almost no economic growth. According to Kiplinger, stock values ended the decade about where they started and median income adjusted for inflation was at $49,777 (5% lower than 10 years ago). Real GDP did gain 20% which is only an average of 2%/year (in the face of an inflation factor of 2.7%/year) and employment was essentially unchanged when comparing 2000 to 2010. I have no crystal ball as I have stated in past blogs, but I do observe that many sectors of our economy have exhibited much innovation and productivity increases. It is my expectation that innovation will continue and that technology will be a leading edge toward prosperity in the US. It is my hope that the job requirements and skills available mismatch that we are currently experiencing will resolve over time allowing for improved unemployment statistics. Mean while, it is likely that those of us who are contemplating a move toward retirement will work a little longer. I point to our own efforts to establish a retirement benefit because it is the employee’s deferral of compensation which provides the greatest potential for retirement savings in the current defined contribution atmosphere under which most are saving for retirement. Many employers do provide some help in this effort through matches an other incentive programs, but to a great extent, defined benefit pension plans are disappearing. According to studies done by the National Institute on Retirement Security, it is the promulgation of regulations since the 1970’s which have caused employers to shift to the defined contribution universe. Cost is not so much the issue according to NIRS studies, but rather the volatile environment created by these regulations which leads to unpredictable funding requirements and the inability to budget long-term for this employee benefit. Employers are trending toward systems with predictable costs which are in some instances higher over the long term. Studies by the Center for a Secure Retirement spell out the effect of this dynamic on the near retirement and retired age group (those ages 55 to 75).  It turns out that nearly 2/3rds of near retirees and early retirees lack confidence in their retirement security. Those who are engaging the advise of qualified professional planners are more confident on the subject of retirement prospects. The Federal Reserve states that the median income household headed by someone with a 401k in the age group from 60 to 62 has saved only 25% of what will be required to provide a secure retirement even when social security benefits are considered also. This information should be a message to individuals with an extended time horizon before retirement that retirement savings needs to be a priority over consumption, even in these times of restricted cash flows and uncertain income sources for many. Government also needs to once again examine the unintended consequences resulting from regulations on tax deferred retirement savings strategies which have created this current dynamic. I will dedicate my next blog to issues surrounding social security benefits, retirement savings and proposed solutions to retirement income streams offer by banking institutions and the insurance industry.

For the Record:

DOW                  12,220.58

NASDQ               2,743.06

S&P 500            1,313.80

Suggested Reading:          “Security Analysis” by BenjaminGraham 1934

Leone’s Money Monitor Monthly for the Month of March 2011

by Edward Leone Jr. DMD MBA RFC

Contact Information

leonee@vzw.blackberry.net

     It is interesting that many comments I have made in past blogs regarding our economic problems are coming to be recognized and acted upon. It appears that the government’s role in the home mortgage industry will be changed drastically. Although the road to be traveled toward more fiscally responsible policy will be bumpy and contain many curves, the journey is starting. The debates taking place on the Federal and State level over how to balance budgets and reduce borrowing are healthy and needed. The practice by governments of making promises to employees regarding retirement and other benefits while not funding these programs with actuarial discipline, but rather using political considerations has caught up with us.  

     We are observing the kinds of influences global politics can have over financial markets in these past several weeks. Concerns over oil prices and supply issues are relevant. While political unrest and the instability of governments in Africa and the Middle East are feeding much speculation, it is difficult to predict the likely outcome. The effects of conclusion on these issues will take a while to unfold and will certainly be significant. Affordable food supplies are a topic of concern due to drought conditions in some areas of the world which have reduced production of corn and wheat. Some grain prices are up over 70%  due to these factors and the accelerating demand globally. Hording of product is also a factor at this time. We must hope for record production during the 2011 growing season to mitigate these cost challenges.  It is likely that hungry populations will lead to further political unrest.  We are experiencing some price inflation in the US of food products, but since we are the world’s greatest exporter of food stuffs, the effects are modest compared to other countries where 25 to 50 % of earnings are spent to feed the family. A bigger concern for the US economy has to do with consumer spending. It is rising again, but at the expense of reduced savings habits and expansion of debt other than mortgage debt. This is not sustainable. We have to put people back to work in order to broaden and sustain the consumer drive to the economy. The slowing of layoffs is a positive trend. Government needs to measure the effects of stifling regulation on business and work to promote a favorable business environment without constantly screwing things up as the result of the unintended consequences of government activity. One example of this type of effect is the Heath Care Reform Act. The motive may be well intended in the eyes of some, but an analysis of the bottom line costs and utility result of this legislation is not a matter of consensus and could be very dangerous and harmful to individuals and society. There are many ways to solve health care service disparities. They need to be examined and vetted before implementation.

     On the positive side of things, it is evident that the US economy is improving. GDP is projected to grow at a rate of 3.5% for 2011. The 2010 rate was 2.9% according to the Kiplinger Letter. The S&P 500 index is up 100% over the last two years. Given all of the potential forces stated in previous paragraphs, it will be interesting to observe the sustainability of earnings growth for this index. It appears that the NYSE Euronext and Deutsche Borse may merge. I have no opinion at this time as to whether or not this is a beneficial move from the prospective of traders and investors. It is significant that the US dollar is rising in value against other global currencies. We are still viewed as the safe haven when times are troubled. Many are looking toward the Euro to replace the dollar as a global base currency ; however, financial and economic challenges within the Euro zone along with the differences of commitment to solutions by European governments may slow or stop this trend of thought.

     Interest rates are rising slowly in the US. The ten-year treasury bond is yielding about 3.6%, ten-year muni bonds are yielding 2.9 % if they are rated investment grade and ten-year corporate bonds investment grade are yielding 4 to 4.75 %. On the more speculative side, high yield corporates are yielding 7% and high yield muni bonds are yielding 5.8%. We are likely to see mortgage interest rates go up along with the cost of  other types of loans.  Richard Dobbs and Susan Lund of the McKinsey Global Institute wrote a great article in January of 2011 titled “Five Myths About US Interest Rates” .  They make the points that:

1. The Fed controls the federal funds rate, but other long-term interest rates are determined by market influences such as inflation, government deficits and demand for capital.

2. Low interest rates are a temporary condition. Interest rates are likely to go up due to increasing demand for capital in emerging market economies along with the decreasing trend in global savings habits.

3. The thought that US policy should embrace low-interest rates so consumers will spend to boost the economy is in some ways self-defeating. Increased savings habits will help with the availability of capital for investment, reduce consumer debt as deleveraging takes place and secure the retirement prospects for the US population. There is a balance to be sought here.

4. The deduction of mortgage interest is untouchable. This would depend on adjustments in marginal tax rates if the deduction were to be eliminated.

5. Higher interest rates are not necessarily bad for the economy since they would benefit savers, limit the potential for speculation which leads to economic bubbles and focus efficiencies on capital budgeting by businesses.

It is my view that given the likely trends for interest rates, savers for retirement purposes may have been too conservative over the last several years. Much of the rebound in equity markets as indicated by the S&P 500 index may have been missed by bond holders. Interests rates are likely to go up. We are not sure when that big move will take place, but when it does, the market price of bonds held in those retirement portfolios will go down. It is important to maintain an appropriate asset allocation and diversification with a discipline of rebalancing of portfolio holdings in both good and bad economic times to avoid severe investment loses since markets do cycle and timing those cycles on a consistent basis is next to impossible.

For the Record:

DOW                    12,130.45

NASDAQ            2,781.05

S&P500             1,319.88

Suggested Reading:

“Reengineering the Corporation” by Hammer and Champy

By Edward Leone Jr. DMD MBA RFC

Contact Information:

leonee@vzw.blackberry.net  

   All readers should now be aware that the IRS has announced delays in the processing of 2010 tax returns and the associated refunds due to computer network adjustments required as a result of some retroactive tax changes enacted by Congress affecting 2010 filling for those who itemize deductions on schedule A.

     We also observe the price movements at the gas pump. Commodity prices are on the rise in general. This may be an indicator of future inflation trends. Although it is reported that OPEC still has excess capacity, the halt imposed by government on off shore drilling and other potential U. S. oil resource domestic development will hinder growth of global oil supplies in the face of increasing demand. The only logical direction for oil prices is up and as a result, higher prices for just about every product and service which involves petroleum in its fabrication, performance or delivery.

     Another area in which costs have continued to accelerate is college education. The expected rate of increase continues at between 7% and 8% per year.  Average nation wide annual expense for tuition, fees and room and board are pegged at $16,000 for in state public schools, $28,000 for out-of-state public schools and $37,000 for private schools. The elite category of private schools can run up to $50,000 according to Financial Advisor Magazine. Families with children planning to attend college need to become familiar with the variety of education savings plans available and how the plan chosen will help meet their needs at the earliest possible opportunity. The 529 plans seem to be most popular at this time, but there are other opportunities with the Education IRA (Coverdell), Uniform Gift to Minors trusts and the cash build up in some insurance products. The landscape for financial aid is also changing with direct Federal Government involvement in administration and funding of some programs and efforts by some universities to engage in direct lending to students.  Identifying the appropriate educational institution can also be a challenging task for families. Professional help is available for those who feel the need.

     I read an interesting article written by Robert Laura on FA magazine.com. It appears that there is a significant increase among those in the retired population who are alcoholic or use drugs. The incidence of depression is also increasing. This tells me that a financial plan is not enough for many clients. It is also essential that individuals develop a life plan for retirement that includes  development of interests and activities which stimulate the individual in a meaningful way. How many of us have observed an early retiree who parks him or her self in front of the TV all day doing nothing productive and passes on in just a few years while so many others remain engaged and live long and productive lives? One issue that still surprises me in discussions with those considering retirement is a lack of consideration of the effects of inflation on their continuing life style costs. If you plan to spend $80,000 per year in life style costs and you are currently 65 years old, you are likely to experience the following increases in financial need over time:

Annual Inflation—1%  age 75—$88,400

                                              age 85—$97,600

Annual Inflation—3%  age—$107,500

                                              age 85—$144,500

Annual Inflation—5% age 75—$130,300

                                              age 85—$212,300

When those planning retirement are exposed to this information, many people are forced to reconsider their strategy. Many who are retired or planning to retire soon and have engaged fixed income investments such as cash and cash equivalents are suffering through some low yield years. Bank savings accounts are paying about .2% while money market funds are yielding .04%. CDs are yielding somewhat better, but you have to go out a few years to get close to a 3% return. It is likely that many of us will keep our day jobs a little longer than anticipated.

     Credit is more difficult to obtain in our current environment. There are many factors to consider when seeking credit. The consumer debt-to-income ration is one of them. Dividing total consumer debt (don’t include mortgage or rent payments) by total net income will get you there. Lenders are looking at 15% as acceptable, 20% could mean trouble. A credit score in the middle 700s is desirable. Variables above these bench marks will lead to higher interest rates upon borrowing.

     I am sorry to deliver such negative news in this blog, but we all need to have a realistic prospective on what is happening in our economic environment. Just one additional note of interest, Bloomberg tells us that in 2010 89.1% of the e-mails which showed up in our in boxes were spam.

For the Record:

DOW               11,823.7

NASDAQ        2686.89

S&P500        1276.34

Suggested Reading:

“The Wall Street MBA” by Ruben Avani

By Edward Leone Jr. DMD MBA RFC

Contact Information:

leonee@vzw.blackberry.net

     This blog represents one year of effort to inform and entertain the reader regarding a variety of financial issues. I hope the 12 posted blogs have initiated some serious thinking about your financial future along with creating a more critical view of the US and global economy from your prospective.

     It is appropriate, since we have just entered a new year, that I prognosticate on the potential for economic health in 2011. I have no crystal ball, but will give it a try based on my constant reading from a variety of sources on this subject along with my understanding of the forces which make the economy move.  It is likely that we are moving into a sustained but slow-paced recovery.  A key force in advancing the recovery will be consumer spending, It has crawled along at 2 to 3 % over this past year. Higher employment levels in 2011 should charge this element in economic growth.  Inflation is likely to be modest between 1 and 2.5%. It is accelerating commodity prices which will be a key driver of inflation in the US partly due to the relatively weak status of the dollar against other international currencies. Fortunately, global commerce is mostly conducted in dollars. With continued advances in emerging economies, demand for US exports should continue to expand. This will stimulate job growth in the areas of heavy equipment, technology and a variety of other service areas which are in demand globally. The US Congress needs to adopt fiscal policy which will bring capital back into the US economy instead of continuing the policies which have kept capital parked overseas through the previous decade in order to further the effort toward improving domestic job growth. Potential head winds to continued economic growth in the US come in the forms of still unknown outcomes for the economic calamity occurring in Europe, possibly higher interest rates, actions taken by the Chinese and Indian governments regarding high inflation in their economies along with potential economic slow downs and the unknowns regarding geopolitical issues around the globe. The Federal Reserve has come under significant criticism over its activities aimed at growing the economy. I think the Fed is doing what it needs to do in order to avoid a repeat of the Great Depression by continuing its trend toward increasing liquidity in the money supply. This action also avoids the very experience which the Japanese government continues to perpetuate over the last 10 years with a tight monetary policy. The down side of the Fed activity is increased inflation in the future and a continued weak dollar on international markets. If the US Congress had taken appropriate fiscal policy initiatives over the last three years, we probably would have never heard about QE2. The US Congress also needs to take responsiblity for many obviously failed initiatives over an extended period of years which created the environment leading to the economic and credit collapse in our country and correct them.  Along with the already mentioned necessary fiscal policy adjustments, changes to the operations of government involvement in the mortgage market along with enforcement of financial regulations regarding credit ratings and derivative markets are essential. Our government must understand that adopting strategies which grow the economy will increase government revenue sources. Government cannot continue to grow as a portion of GDP while crowding out the private sector and have prolonged economic successes.

     Regarding equity and bond markets, I believe that equity markets will continue to rise at a slow but respectable pace. It appears that many investors are happy to take the low yields offered by Treasuries and investment grade corporate bonds at this time due to their terrible experience of 2008 with stocks. This attitude is likely to change as the population begins to gain further confidence in the economy and recognizes the potential accelerated income streams offered in equity markets. Where are the best values in which to place your equity investments? Seek the guidance of a highly qualified Chartered Financial Analyst to help with those decisions. Bond prices will clearly take a hit as interest rates go up. Considerations for maturity and duration are key elements in building a bond portfolio which meets your income needs over the long-term.  

     I must admit that the housing market has me scratching my head. I do not know what to think. The situation is bleak with the continued trend toward foreclosures. I believe that the paper chase involved in the stall of many foreclosures in 2010 is just going to prolong the agony. The inventory of housing available for purchase is at about an eleven month supply according to CNN Money. The number of new housing starts, according to the same source, is at a 50 year low.  On the positive side, with the grand supply of available housing, pricing is down. That fact along with what are very modest mortgage rates at present, make buying a home much easier and affordable for those who can qualify for a mortgage. If employment increases, these factors could very well shrink the over-supply of available housing more rapidly.

     Looking back at 2010, we cannot ignore the potential effects which two pieces of legislation passed by the US Congress are likely to have on the lives of all Americans. I am referring to Health Care Reform and Tax legislation. The impact of Health Care reform legislation began in September of 2010 with mandates in place requiring that there be no life time maximum benefit limits placed on health insurance coverage, there be no underwriting criteria for preexisting conditions and dependents may be covered under a family plan up to the age of 26 years. We are already seeing the effects of these mandates in the form of elevating insurance premiums. If you are a small business owner, look for the following changes in you benefit package strategies as a result of  this legislation:

1. including the cost of health insurance on the employees’ W-2

2. a cap on FSA contributions at $2500 with no index for inflation

3. increased penalties for distributions from HSAs before the age of 59 for other than health related expenses

4. the ability to establish a Simple FSA for your employees

5. requirement to report all consumption of products and services over the amount of $600 on a 1099

6. the potential for  tax credits on the costs you bear for providing health insurance coverage to employees.

There are also tax increases aimed at higher income earners to support Medicare. This legislation is not all good and not all bad depending on your interpretation. The fact of the matter is that the rules are changing when it comes to consumption of health care services. We all need to learn the rules and make input to the US Congress on what adjustments are necessary.

     The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 is a true piece of compromise legislation. There is a little something for many interest groups in the law. The key factor which it accomplishes is the continuation of marginal income tax rates at their current level for another two years. What after that–who knows? It also expands the federal deficit due to the many subsidies and credits contained in it. Congress needs to adopt an attitude which motivates it to act in the best interest of the entire country rather that taking steps to cater to special interests in their districts or financial support universe.  

     Given the fact that most of us will be filing our income tax returns in the next few months, I thought I would list the contents of a great article found in Kiplinger  December 2010 written by Joy Taylor on “IRS Audit Red Flags”. To avoid an audit of you tax return avoid the following:

1. failure to report taxable income

2. claiming the home-buyer credit improperly

3. claiming large charitable deductions

4. taking the home office deduction

5. poor documentation of business meals and travel

6. claiming 100% business use of a vehicle

7. claiming hobby loss

8. poor records for cash based businesses

9. failure to report a foreign bank account

10. engaging in currency transactions

11. math errors

12. takeing larger than average deductions.

     Well, a HAPPY NEW YEAR  to all!!

For the Record:

DOWJIA             11,577.51

NASDAQ             2,652.87

S%P 500             1,257.64

Suggested Reading:

“Leading Quietly” by Joseph L. Badaracco Jr.

    By Edward Leone Jr. DMD MBA RFC

    Contact Information:  leonee@vzw.blackberry.net

 As the US Congress goes back into session, there are many issues left for this lame duck Congress to discuss.  Among them getting much attention is the continuation of current tax rates (know as the Bush tax cuts). I get very upset when I read that continuing this tax rate or that tax rate at its current level will cost x number of dollars in lost revenue over the next ten years. How can anyone estimate the revenue gain when the tax rate is adjusted up given the propensity for the population to change revenue and expense patterns to avoid additional tax burdens? It is my opinion that tax rates are still too high and not distributed over a broad enough scope of the population and business to make them workable in an economic recovery. The other part of the formula which is recognized but not adequately discussed is government spending. In the year 2000, federal spending was a touch over 20% of GDP. Today it is rapidly approaching 24% of GDP. The gap in revenue which hovers around 20% of GDP is funded through borrowing and monetization. Borrowing is just the creation of a future tax and monetization is the incremental addition of  more currency to the existing pool which creates another hidden tax know as inflation. We are also engaged in a strategy which keeps lowering the value of the dollar against other international currencies to make our exports cheaper. This trend is raising our energy costs dramatically since we import so much oil. Other countries are engaged in the same type of strategy. Where will this insanity end? Who will have the courage to face these issues and develop sensible solutions? Are we as a society ready to come to grips with these issues and do what is necessary to rebuild our economic stature to the benefit or our population and the global population? We must as a society, decide what businesses it is that we want our government to conduct. We must also examine the unintended consequences of programs which have been in existence for extended periods without good sound economic principles as a foundation rather that the political motive foundation which runs most of them and make appropriate adjustments or eliminate them. These are very challenging times. Unless the global economy grows, our slice of the pie is not likely to grow substantially. Unless government stops expanding its section of our piece of the economic pie crowding out private economic interests, we will fail to remain a leading global economic influence. Kiplinger has done a projection for the growth rate of several economies in 2011 as follows:

US   3%   Euro Zone   1.3%   China   9%   Japan   1%   UK   1.9%   Brazil   4.6%   Russia  4%  Canada    2.5%   India     8.3%   So. Korea    3.9%   Mexico     3.6%

     On a potentially positive note for business, the very burdensome 1099 requirements instituted with the passage of health care reform legislation may be repealed with the passage of the safe food bill. Why can’t congress stick with legislative content reflective of a bills title?

     The fix for Social Security will be a challenge for many citizens to navigate.  According to the Employee Benefit Research Institute, employees participation in retirement plans at the work place fell to 39.6% in 2009. This is the lowest participation since 1993.  Payroll tax revenues are also down due to high unemployment rates. The number of employers offering plans has decreased by about 10% over the last 10 years and surplus Social Security funds over and above what has been needed to meet the program’s obligations have been borrowed instead of invested. With a fix, benefits are likely to decrease, taxes will increase due to the need to replenish funds borrowed from the program, individual retirement savings being down will create a short fall in income  for many retired persons and the return on fixed income investments is so meager that interest income is severely compromised while market risk is likely to increase.  Look also for increases in payroll taxes as a part of any fix. I must apologize for so much negativity, but we need to begin some discussion on this matter and several others.  We may in the future, be better off with a private system which does not pump money into inefficient and politically driven government hands, but instead takes that 12%+ of employee compensation contributed by the employer and the employee to be invested in a personal account owned by the employee.  Please share your thoughts.

     Regarding another government imposed issue, health care reform, according to Hewitt Associates consulting firm, the average cost for group health care plans will increase by 8.8% between 2010 and 2011. The employees’ share of premium costs along with deductibles and coinsurance costs will go up as a result of the trend toward cost shifting.

     In the spirit of trying to be helpful, I read a great article on Investopedia written by Steven Merkel CFP ChFC. He talks about many commonly over looked to do items in estate planning which are simple for an individual to accomplish given the time and the dedication. These steps make estate transfer much easier for family upon the passing of the individual:

1. perform a physical item inventory

2. perform a non-physical item inventory

3. prepare a credit card and debt list

4. get these lists to your designated estate administrator

5. review IRA and other retirement accounts

6. review and up date life insurance and annuity contracts

7. make TOD (transfer on death) designations

8. up date your will and other estate planning documents

Pretty good advice for everyone!!

For the Record:

DJIA                   11,092.00

NASDAQ               2,534.56

S&P 500               1,189.40

Suggested Reading:    “Invest Like the Best” by James O’ Shaughnessy

By Edward Leone Jr. DMD MBA RFC

Contact Information  leonee@vzw.blackberry.net

We are very much interested in learning election results and what those results may mean for our economic future. The vote count will be available early in the month, but it is likely to be a little time before we have some idea of what steps may be taken to advance the improvement of our US economy.

I spent some time in the October blog discussing issues involving the Chinese economy. Let’s take a little time to examine another emerging economy. India is expecting a growth rate of 8.5% of GDP for 2010.  Last year the Indian Central Bank embraced a strategy of  lose money. The liquidity approach has certainly improved economic conditions since the 2009 growth rate was 6.5% of GDP.  The result has been a serious dose of inflation. The whole sale price index in this country is up 10.5% June to June and has not yet abated. Other challenges to a growing economy in India have to do with the competition for water between the steel industry and agricultural interest. India with its large population, is challenged to feed the masses and must maintain an adequate agribusiness. This requires large amounts of water. The steel industry in India, which is gaining prominence globally due to the vast stores of iron ore as a natural resource in India also requires a great committment from the water supply. How does India balance these interests and continue economic growth?

In our own back yard, there has been significant debate over whether or not we have turned the corner in our own economic health. The major signs to look out for according to the Financial Edge by investopedia are as follows:

• Employment–The statistics come in many forms here. The rate of unemployment (not very accurate due to the way it is measured to included only those seeking work), non-farm payroll (gives perhaps a better sense of company hiring practices) and the ASA Staffing Index (much less know, it measures activity in the temporary staffing industry) are statistics to watch.
• Consumer Spending–In an economic recovery, demand is a part of the formula that creates the need for greater production and therefore more hiring by fabricators.
• Business Indicators–Such indicators as the Purchasing Managers’ Index (surveys the amount of new order experience) and inventory levels demonstrate the need for new fabrication.
• Bank Lending–Growth and new expansion require a source of credit.
• Shipping Activity–Economic activity has much to do with the movement of goods across the country and globally.

These factors represent some trends to watch in making  judgements on where the economy is headed and when and where to invest.

While on the subject of investing, there are several factors which financial planners can help you identify in making investment decisions which many individuals fail to consider. Once again, the Financial Edge provides an excellent list of factors:

• Risk–This is a very complex subject in that many people perceive and define risk in several ways. Along with that, there are a variety of different forms that risk may take depending on the investment vehicle under consideration. A full examination of risk factors is essential before engaging an investment. There is NO 100% safe risk free investment which will perform under any and all market conditions and for all individual needs and circumstances.
• Fees–The type and size of fees definitely effects net return on investment and should receive detailed consideration.
• Power of Compounding–This is the key element in asset growth when the discipline of reinvesting returns is engaged.
• Taxes–Taxes will reduce the net return on investment. Consideration of the type of investment vehicle and how the investment should be held (tax deferred environment or taxable environment) are considerations in protecting investment returns.
• Market Factors–We cannot control the business cycle, but need to identify the phase in the business cycle during which we chose to invest since this issue may guide us in the type of investment chosen.
• Diversification–This long-standing investment discipline is helpful in designing a portfolio which meets the investors risk tolerance levels under a variety of market conditions while also lending to the meeting of investor expectations over the longer time horizon.

As we draw closer to the end of the 2010 tax year, there are many IRS and ERISA rules which individuals and small business owners must consider in being effective tax filers.

• The wage cap on Social Security payroll tax withholding is $106,800.
• Salary deferral for qualified retirement savings plans in 2010 are limited at–401k (elective deferral) $16,500; 403b (tax deferred annuities) $16,500; 457b (deferred compensation) $16,500; over age 50 catch up $5,500; Simple plans $11,500.

The above retirement savings limits are important in that many are not close to the potential for retirement savings in a tax deferred environment. The center for Retirement Research at Boston College says there is an income gap of $6.6trillion for the retired population. This will certainly create another societal challenge for us as the future unfolds.

For the Recrod:

DJIA 11,193.60

NASDQ  2,529.59

S&P 500  1,193.22

Suggested Reading: “Guide to High Performance Investing” by Wesley F. Mann

By Edward Leone Jr. DMD MBA RFC

Contact Information:

Dentistry                  www.leonedmddentalcare.com

Financial Planning  leonee@vzw.blackberry.net

     The interactivity and exchange of information through this blog is growing. As a result of comments I made about the slow down in GDP over the second quarter of 2010, several readers shared their difficulties in maintaining employment and business viability along with strategies they are using to mitigate these negative experiences. These strategies include retraining for other career opportunities and severe scale down in business structure to survive in the short-term. It is apparent that many more are hurting, but not talking about it. Congress has left Washington to go home for a while. Perhaps we are safe for the next few weeks and can reassess our possibilities in surviving what has become a very long period of economic slowness.  

     Much has been made of the contribution that derivatives have made to the collapse in financial operations globally. How many of use really understand derivatives and what it is that they do? Kristina Zucchi has written a great article on investopedia.com called Derivatives 101. The content will be helpful to any and all who are interested in the subject of derivatives. Derivatives and futures contracts have been used in the agriculture industry to help stabilize prices and profit margins for many years. “Derivatives are  types of investments where the investor does not own the underlying asset, but makes a bet on the direction of the price movement of the underlying asset via an agreement with another party. There are many different types of derivative instruments, including options, swaps, futures and forward contracts.” There are three main reasons why investors might use derivatives:

1. Hedging—-a strategy used to insure against the risk of an asset’s price changes.

2. Increase Leverage–Since the investor who owns a derivative or option does not own the underlying asset but the right to buy that asset at a given price within a given time period, one can magnify the gain when the price of the underlying asset goes up and, of course, can experience magnified loses when the price of the underlying asset goes down depending on the type of option “put or call” owned and the position of the investor “long (buyer) or short (seller). This leverage aspect is a part of the speculators advantage when speculation of future price structure is a part of the strategy.

3. Speculation on Future Prices

Derivatives can be traded in two ways:

1. Over the Counter—-the source of much of the controversy of the role of derivatives traded in this fashion and the potential lack of transparency which goes along with this trading forum. Many trades are private and not regulated in any form.

2. Trading on an Exchange–derivatives are standard contracts handled by an intermediary. Content and structure are openly available and know to investors.

Options–the right to buy or sell an asset and take advantage of price movements without owning the asset. Positions:

1. Long Call–the right to by an asset in the future at a fixed price (exercise price) up to some point (expiration date) for a premium.  The advantage comes if the market price rises to a level that exceeds the exercise price and the option premium. This condition (in the money) yields a profit.

2. Long Put–the right to sell and asset in the future at a fixed price up to some point in the future. The advantage comes if the market price falls bellow the exercise price and the premium paid.

3. Short Call–selling to another party the right to buy an asset at a fixed price up to a point in the future. The advantage comes here if the market price of the asset declines bellow the exercise price since the option will not be exercised by the buyer and the premium represents the profit to the seller. If the market price goes the other way such that the rise is more than the exercise price and the premium, loses can be  significant to the seller of the call.

4. Short Put–selling the right to another to sell an asset at a fixed price up to a point  in the future. The seller wins if the asset’s market price goes above the exercise price since the put will not be exercised and the premium paid to the seller of the put is the profit. If things go the other way, loses can be significant.

The math necessary to analyze these strategies is complex, but a necessary exercise to improve the odds of achieving a successful out-come.

Swaps–the exchange of cash flows or other variables associated with investments.

Interest Rate Swaps–exchanging of fixed rate assets for variable rate.

Currency Swaps–exchange of payments or investments from one currency to another.

Commodity Swaps–based on pricing of underlying commodities

The winning strategy here depends on the prospect of a win-win for the parties engaged. It does not alway work out that way, particularly if the asset involved in the swap fails to perform in the market place or the information available on the asset is faulty (such as a credit rating).

Futures Contracts–used to hedge risk of price changes in commodities at a future time. The contract holder has the right to buy or sell an asset in the future for a fixed price.

We us these concepts ourselves in our everyday commerce without realizing it. Options on the purchase of a home, buying grocery items when discounted with the expectation that the price will go up in the future and selling receivables of your business at a discount to an investor are examples.

     Another subject I committed to discuss this month is the Social Security System.

Few people know of the following facts:

1. The Social security System is now 75 years old.

2. The system is bigger than the economies of most countries. Through 2007 $13 trillion has been collected and $10.6 trillion paid out.

3. It’s not just a retirement program. Disability benefits and survivors’ benefits are also a part of the program.

4. You pay 6.2% of your income into the system. This amount is matched by your employer yielding a 12.4% contribution up to $106,800 of income for this year.

5. Cost of living increases are not a mandatory feature.

6. Retiree benefits vary with the time of filing and married couples have several design options.

7. Your social security number tells where it was issued by the first 3 digits.

8. Paper benefit checks are just about gone. Direct deposit is the method of benefit transfer.

9. The trust fund has a projected deficit and will not meet total benefit obligations after 2037.

As a financial planner, the Social Security benefit an individual will gain upon retirement is an important ingredient in retirement planning for clients. Use a financial planner to help you explore this potential in concert with your retirement income needs and other available assets.  What is needed to fix the system? We are hearing much about raising the retirement age, means testing benefits, changing the COLA calculation rules, setting up personal accounts and raising payroll taxes. I have no idea what will be contained in the ultimate solution. I can say that the longer we wait to address this issue, the more difficult the fixes will be to implement and accept.

     Many investors have been shifting equity investment strategies to developing economies across the globe accepting higher risk with the expectation of higher returns from these growing economies. China is very high-profile in the news with its 10% plus growth in GDP and its gain in stature as a global economy. Putting aside social and civil rights conditions in China, economic growth in that country has imposed significant hardships on the population. The relocation of agriculture workers to the city to gain a better standard of living much as occurred in this country in the late 19th century and early to middle 20th century during the industrial revolution is stressing the country’s ability to feed the population. Pressure on urban housing demands is causing inflation which low salary workers cannot manage and working conditions are less than desirable. The educated are having a difficult time finding work because the key demand is for low skill assembly workers and not those with innovative and entrepreneurial talents. Other broader issues include financial mismanagement which with the central government planning is causing massive bank bail outs, corruption in regional government entities costing the Chinese economy $700 billion a year and severe water and air pollution (we were able to see the air pollution issue during the telecasts of the olympic games). The lack of consistent contract law is also a problem which Warren Buffet’s BH is learning about as a result of its significant investment in China’s auto industry. The question is “With all of these challenges, can China keep up this aggressive rate of growth?” Only time will tell, but caution and good research are essential before investment into the Chinese economy is  considered.

     Look for comments on India’s economy in future blogs.

     If you are a Colorado resident, you have just in the past day or two received you blue book. I will review it and have some discussion from an economic prospective in the November blog before the election.

For the Record:

DJIA                 10,788.05

NASDQ              2,368.62

S&P 500            1,141.20

Suggested Reading:    “The Power of Living Your Values

                                        What Matters Most”

                                        by Ken Blanchard

By Edward Leone Jr. DMD MBA RFC

Contact Information

Dental    www.leonedmddentalcare.com

Financial Planning    leonee@vzw.blackberry.net

     As I stated in the August Blog, one of the goals and purpose of this blog is to have an interactive exchange of information and ideas. We did have a respondent to the August Blog. The respondent forwarded a paper done by David Kaiser PhD, a respected historian. Dr. Kaiser is currently a professor in the Strategy and Policy Department of the United States Naval War College. He dedicates this paper to a comparison of conditions in the US today with conditions in Germany during the middle 1930’s. It is scary, but a great read.  Google it. Read it and let us know what you think!

     Before I go into the variety of money and finance happenings over the month of August, I would like to spend some time sensitizing the reader to a very important financial planning issue that I find being over looked by many prospective clients. The question I pose is “What four documents must every individual have as a part of financial and life planning?” Those four documents are: 1. Advanced Health Care Directives (Power of Attorney for Health Care Matters) which grants on your behalf a person or entity to make health care decisions in your incapacity to do so. With out this document some judge in a court room may perform this duty and perhaps not to your expectations. 2. A Living Will which give directives on resuscitation and life support issues in the event you are faced with such conditions. 3. A Durable Power of Attorney for Custodial Matters in the event that you are incapacitated to the extent that you are unable to care for yourself and perform financial duties on your own. 4. A Will or will substitute to express your wishes regarding the disposition of property upon your passing. Without this, a judge will perform this duty based on law existing in the state of your residence and perhaps not in a tax efficient manner.  If you have not addressed these issues, seek out a financial planner and an attorney to get this portion of your financial and life planning acomplished.

     We are hearing and reading much about health care and the elements of the Obama Health Care Reform Act of late. This legislation appears to be as much a piece of tax legislation as it is related to health care. The mandates for production of a form 1099 by businesses on all expenditures above $600 is unworkable and under consideration by some in the US Senate for repeal. The tax on medical devices (we do not yet have a definition of what is a medical device) can also be unmanageable when we consider the potential for what may constitute a medical device. There is also talk in the Congress about repeal of this portion of the legislation. The 1099 issue will put businesses in a difficult situation regarding compliance. The record keeping and paper work associated with this will likely suppress business entity consumption of many products leading to a slowing of economic growth. It is also likely to be the full employment act for accountants. The tax on medical devices is a great way to reduce health care costs since demand will be suppressed. Such high-tech device purchases as the MRI Imaging device will be less frequent making the benefit of this diagnostic less available to the public. Such common devices of more modest cost will also see a slump in demand by those who cannot pay these additional costs. Devices such as dental implants, knee and hip implant devices will be less utilized unless third-party payers are willing to pay the tax instead of making it an exclusion in the plan designs they offer. We are also likely to see numerous adjustments in the financial reform legislation as more of the details unfold also.

     I just touched on economic growth in the last paragraph. You need to know that economic growth in the second quarter of 2010 slowed to 1.6%. This is certainly not a sign that good times will be returning soon. There are many factors that play into this happening. Only time, the election and the actions of the US Congress which can stimulate confidence in the future for the business universe or  perpetuate  uncertainty for business activity will tell the story.

     What does the average investor do in this climate and how is it best to strategize savings for retirement? These are very difficult decisions to make. Continued volatility in equity markets, particularly the slow downward trend we are witnessing has driven $380 billion into bond funds so far this year. The assumption of many investors is that bonds are safe. Certainly the yield is relatively safe, but market risk has to be a real concern now and into the future. Long term rates are at a low 2%. The only direction for interest rates is up. We just do not know when. It is common knowledge that the relation between bond prices and interest rates is inverse. When interest rates go up, bond prices decline. It is likely that bond portfolios will experience loses in the future as interest rates trend upward. There is no perfect investment for safety under all conditions. Many are driven to annuities with a guaranteed return which looks attractive in these troubled times. The price paid for that guarantee and the restricted access to your money are serious considerations before purchasing and annuity. Certainly short-term financial needs should be kept in cash or cash equivalents. Other investments may be placed in a diversified variety of longer term investments with the allocation tailored to the investor’s risk tolerance and time horizon.  Please use a professional to help with this work.  Nouriel Roubini in his book “Crisis Economics” suggests that a return to the restrictions put in place under Glass-Steagall where there was a full separation between commercial banks and investment banks is what we need to do. This business of to big to fail has to end. It does appear that there is some rethinking occurring in the US Congress regarding the status of Fannie and Freddie. The transparent trading of derivatives and swaps will also be helpful while a turn around in the real estate market is projected to take some time.

     It is clear that we live in a global economy where a shift is occurring according to the McKinsey Quarterly from developed to developing economies as it relates to rate of economic growth. Technological advances in rapid communication and low-cost labor markets will continue to perpetuate this trend. Emerging markets with younger populations will provide not only consumer demand, but also a source of capital, talent and innovation. The risks associated with international business transactions focus around protection of intellectual property, currency exchange rate volatility, geopolitical instability and quality standards.  As you can see all is not perfect, but it appears that the risk reward ratio is favorable for some businesses. When it comes to exchange rates, Jason Van Bergen of Investopedia tells us that six factors are at play: 1. differentials in inflation, 2. differentials in interest rates, 3. currency-account balances, 4. public debt, 5. terms of trade and 6. political stability and economic performance. The US is still perceived to represent quality in these areas; however, our status at present is clearly somewhat compromised. At Investors.com, an IBD Editorial presents our public debt standing at 62% of GDP and trending to 90% in the immediate future with a potential for it to be 146% of GDP by 2030 as our biggest problem.

     Among US international trading partners, China reached a new mile stone this past quarter achieving status as the #2 economy globally surpassing Japan at about 1/3rd the size of the US economy. Not all is rosy in the Chinese realm, though. We will spend more time on that in future blogs. Bribes as a part of doing business in China is a drag on the economy to the tune of 10-13% and there is more to come.

     On a final note, we observed a variety of primary election events over this past month. Some, I am sure are thrilled with the results, and others probably not. I took particular note of the Arizona Republican primary where Senator McCain prevailed after spending more that $20mil on a campaign. I sometimes wonder what the difference may be between a bribe in China and a political campaign contribution in the US. Look forward to discussions on social security, the national debt and derivatives along with more on the Chinese economy in future blogs. 

For The Record:

DOW                10,150.65

NASDAQ          2,153.63

S&P 500          1,064.59

Suggested Reading:    “Wall Street Words” by David L. Scott

By Edward Leone Jr. DMD MBA RFC

Contact Information

Dental Care:   www.leonedmddentalcare.com

Financial Planning: leonee@vzw.blackberry.net

     The money and financial issues just keep coming our way. We will soon see the final bill on financial reform. It is interesting to observe the rhetoric coming out of  Toronto, Canada at the G 20 meeting. The Europeans and Canadians want to reduce government spending to avoid further debt accumulation while  Mr. Obama wants to creat more debt to offer additional economic stimulus.  Based on the performance of financial markets globally, it may very well be that we are in the 2nd dip of what may turn out to be a double dip recession.  If this is the case, given the head winds that the US Congress and the Executive have created for us with the climate of chaos and uncertainty for business, we may find ourselves in a prolonged economic recession going on into the future for perhaps another twelve to eighteen months. The growth rate for the first quarter of the years was adjusted down from 3% to 2.7%. New home construction starts are at very low levels in particular since the tax credit to new home buyers has been eliminated. The sales of autos and other durable goods, although improving,  are also in a slump. It is clear that the consumer spark to economic recovery is not very strong if it even exists at all. Continued concern over the financing of European governments’ debt and the restriction of oil exploration due to environmental concerns also cloud the picture for a timely economic recovery. The S&P 500 Index is down approximately 12% from its April 2010 high. Our industrial out put is hovering around 69%. When compared to the average of  81% over recent years, we can see that productivity is fragile as is the potential for an immediate drop in unemployment. Many firms showing profitability are doing so by generating a smaller level of production at much lower cost and with many fewer employees. The June 6th issue of Bloomberg Business Week makes a very interesting observation on page 45 regarding the rush by many investors to precious metals in these trying times. It appears that, “Despite the recent runup, investors who bought at the historic peak are still waiting to break even. After adjusting for inflation, gold is at just half the level it reached in 1980, when the price rose to $850, equal to $2,266 today.”  This observation brings out a point I like to make with potential clients in discussions over the effects of inflation. You need to have almost three times the income you had in 1980 to have the same purchasing power today as you had then.  How is your purchasing power holding up?

     The doom and gloomers are having a field day. Such experts as Meredith Whitney, Nouriel Roubini, Robert Prechter, Nassim Taleb, Gary Shilling, David Walker and others are dutifully pointing out issues surrounding bad government decisions and the untenable growth of government social programs which cannot possibly be supported in their present form into the future as burdens which must be addressed and over come in order to foster economic growth. Harry Dent does much interesting research on the relationship between demographic trends and economic activity. His work is a great source for another angle on what is actually happening to us and what we should do about it. Once again let me state that the November election will be important in shaping the rate at which our economy recovers. I must caution that even with a significant change in direction by the US Congress, fiscal policy changes occur slowly.

     We have experienced a technology bubble and a real estate bubble over the past ten years.  Forbes.com in the month of June did a great job of describing the five steps in the development of a financial  bubble. They are as follows:

1. Displacement–The enamorization of a new paradigm in financial opportunity such as an innovative shift in technology or historically low interest  rates.

2.Boom–Pricing rises rapidly as the trend becomes recognized and publicized. Investors want into this once in a lifetime opportunity at any cost.

3. Euphoria–Caution is thrown to the wind as asset prices skyrocket.

4. Profit Taking–Smart money is selling positions and taking money off the table.

5. Panic–Asset prices reverse direction as investors and speculators are faced with margin calls and must sell at any price.

Will we take heed and recognize this pattern in the future when it occurs again?

     The impact that much of what is written in the above paragraphs has for the average working adult is in the sphere of retirement savings and the reduced or negative returns that many savers are seeing on their investments. The Financial Planning Association, in its May journal, quotes survey results which tell us that 57% of  participants feel that they are behind in their retirement savings.  The survey respondents say that they have little money to put toward retirement savings or that they have started to save too late in life.  In addition, 38% of respondents state that they are very concerned about health-care costs. We learn that it is typical that the newly retired individual does not want to take the risk involved with keeping an adequate allocation of equities in the retirement portfolio, not understanding that the risk incurred is that retirement funds may not last for a potential 30 year retirement period without the strong earnings yielded by equities over time. This is a prime example of behavioral finance which leads so many retired persons to buy annuities. Here, the retired individual incurs purchasing power risk with a fixed annuity not considering  how the fixed benefit will work under future inflationary trends. Those who invest in variable annuities with a guarantee minimum return many times experience high fees and returns over time which are more like those from a bond portfolio as opposed to an equity yield experience. Financial advisers are challenged many times to have the client realize the significance that the withdrawal rate has during the distribution phase of a portfolio. Clients who are concerned with the prospect of running out of money before end of life need to examine the prospect of working longer, saving more or spending less to gain additional financial security. Those of use who are true financial planners must also be educators for our clients.

Suggested Reading:    “Power Hungry: The Myths of Green Energy and the Real Fuels of the Future”  by Robert Bryce

For the Record:

DJIA          10,143.81

S&P 500   1,076.76

NASDAQ   2,223.48

     Hi All, my name is Ed Leone. I have been a clinical practicing dentist for 39 years (need a dentist www.leonedmddentalcare.com) and have a very high level of interest in financial matters. In 2005, I achieved a professional studies certificate in financial planning and in 2009, an MBA in financial planning. As you read, you will determine that I am an expert on only one thing–my opinion. The purpose of this blog is to share information. You can contact me over blog issues or financial planning issues at leonee@vzw.blackberry.net.

     There are more than just a few pressing issues of late which deserve our attention. One of those is the prospect of a Value Added Tax to help government cover the programs and debt it has committed to in this past year and four months. The VAT affects consumers since it is a tax on consumption. It is a national sales tax. You buy and you pay. It is not a progressive tax. In European countries where the VAT is prevalent, the revenues are used to fund such government programs as health care. By observation in these countries and as a matter of common sense, it is easy to see how such a tax will slow economic growth since with higher consumer prices, there is less money available for just about everything else. Another has to do with current studies done by Fidelity showing that the average 65 year-old couple retiring this year will likely spend $250,000 on health care  during their remaining life times not including nursing home costs which could add up to $80,000 per year. How are the members of the baby boomer generation going to deal with this? Along with all of this, we have the potential for another colossal piece of legislation moving through the congress in the form of  financial reform. Bills have passed through the House and the Senate and are now due for reconciliation through a conference committee structure.  These bills deal with consumer protection, executive compensation, the rating agencies, credit derivatives and issues surrounding systemic risk. Outcomes will be a significant matter to the financial industry and citizens in general. This legislation is likely to be as sweeping as the measures taken in the late 1930s.

     I have spent time in previous blogs talking about the Keynesian influence on strategies executed by the federal government to bring us out of recession, but have not spent any time discussing the alternative theory which I believe could be more effective. I am referring to supply-side economic theory. President Reagan quoted this theory in his push to increase tax cuts as an incentive for people to save and invest in order to expand economic activity which would trickle down to the smaller participants in the economy. The theory affects tax policy, regulatory policy and monetary policy to increase economic growth. The Keynesian approach calls on government to stimulate the economy with fiscal and monetary strategies in the event of recession to mitigate a fall in consumer demand which is a temporary measure.  The supply-side theory says that demand does not matter. If there is over production, there is excess of inventory which is reduced as prices decrease. The same dynamic works for shortages. Prices go up creating an incentive to produce more. Lower tax rates give people incentive to be more productive and invest more. If regulatory policy is contained, this is a further incentive to produce and invest. Supply-siders like to see a monetary policy which leads to discipline over the money supply to stimulate growth without the treat of excessive inflation.

     So where are we now? First quarter 2010 GNP grew at a rate of 3%. This would be respectable under conditions where we were at the peak of the business cycle. During the acceleration phase, we need more like 8%. We are not seeing that rate of growth due to actions and lack of actions by the US Congress as we have noted before. Unemployment is a lagging indicator and is not likely to reduce significantly in the near future with growth rates as they are now.  These factors are likely to keep inflation at bay for now. The economy exhibits too much  excess capacity to foster much of a rise in inflation at this time. It is clear that problems in the European economy along with a wind down of the temporary stimulus crafted by the federal government are reflected in the poor performance of equity markets in the month of May. We need a credible policy that balances the federal budget. It is possible that in the forseeable future,we could see an economic train wreck in this country. If we see high inflation coupled with restrictive monetary policy and federal borrowing crowding out the prospect of a reasonable cost for business and private borrowing, we could find ourselves facing the same problems which now exist in Greece, Spain and Ireland.

For the Record:

DJIA 10,136.63

NASDAQ 2,257.04

S&P 500 1089.41

Suggested Reading; “‘Winning the Loser’s Game” by Charles Elis