· The more things change, the more they remain the same. That trite expression has been applied to many different things over the years. We are applying it to what may be an early stage tech “bubble”. Almost every investor is familiar with LinkedIn coming out at $45 per share then jumping to $120 per share in the first day of trading before settling in at around $90 per share. Other examples abound. The very popular Facebook, which may soon also do a public offering, is estimated to be worth $76 billion. We have to admit that at least some of the tech companies are actually making money today with real, viable ideas, but nonetheless, the valuations seem a bit absurd. The tech phenomenon is not limited to the United States and is perhaps even worse in China. Put the words “internet” and “Chinese” together for a company and the value seems to soar beyond belief. While there seems to be little danger of this early stage “bubble” bursting any time soon, it could be a harbinger of something happening in the future should this segment of the technology sector continue to be frothy or become even more ridiculously priced.
· In a recent conversation with some friends who are in the life insurance industry, we were reminded about the importance of doing policy audits from time to time on in-force life insurance policies (regardless of whether the policy is a term, whole life, universal life, or variable universal life). Term insurance is pretty straightforward. As long as you are dealing with a solid insurance company, it’s simply a matter of price. Yet, even if the insured is older, it is worth reviewing the policy because of how much term insurance rates have declined over the last five years. When it comes to the other primary forms of life insurance, however, things get a little more complicated and require a more detailed analysis. For example, we reviewed a policy for a 45 year old male who had $1.3 million of whole life insurance with a leading life insurance company. By taking the cash value of approximately $35,000, the insured was able to obtain a policy for $1.5 million and pay only a $3,000 annual premium rather than paying $7,500 for the existing policy with a lower face amount. Everything was guaranteed just as it was with the whole life policy. We looked at another example where someone had obtained a life insurance policy after having had a significant illness which caused the policy to be rated. Many years had passed since the illness and the health concern was not nearly as great as it was at the time the policy was issued. Additionally, the current underwriting process is more liberal than it had been. There are two opportunities: The first is to go back to the existing life insurance company to see if they will reduce or remove the rating. The second is to issue a new policy, if the economics work. If your life insurance policies have not been audited in the last five years, give us a call. We can help set up the process.
· With 18 months to go before the next Presidential election, the economic news that came out in May was anything but cheerful for President Obama. Although he has recently traveled the country talking about the successes his Administration has had on the economic front for the past couple of years (health care is never mentioned), he faces one stark fact. No incumbent President since FDR has won reelection when unemployment was 8% or higher. Just ask Jimmy Carter (as the most recent example). In fairness to the President, we suggested about six weeks ago that what actually happened in May had a high probability of occurring, i.e., that there would be a bump in the road as it related to jobs resulting from the earthquake and tsunami in Japan, the continued unrest in the Middle East, and the Euro-zone’s debt problems, just to name a few issues. Over the years it has amazed us that Presidential advisors are so blinded by the walls of the White House. Where is the common sense advice that Presidents need? At the moment, the President is talking about “successes” in the economy and ignoring the fact that people simply are not feeling good. How people feel makes a big difference to the economy.
Housing remains in the doldrums and is likely to stay there through much of the remainder of the year. The glut of houses on the market makes us all feel like it will remain that way forever. However, that will change. The fact is that the American population is growing which means that there is an increasing need for housing which will eventually have to be filled. Unfortunately for President Obama, housing is not likely to make a big enough turn around in the next 12 to 18 months to make any sort of difference to the economy. He no longer has George W. Bush as a whipping boy. This is the President’s economy and he needs to find a way to speak to the American public that shows his understanding of their uneasiness and distress. Over the years it is not hard to see that people vote their pocketbook first, and arguably, their safety second. Although the President gets high marks for finding and having Osama Bin Laden killed, do you really feel safer today from Al-Qaeda than you did prior to the death of Osama Bin Laden? Does that really matter when you are literally losing the roof over your family’s head or are seriously trying to find a job and can’t get one? The President has a long road to go and our advice to him is that he doesn't wait too much longer to show his compassion, concern, and empathy for the electorate.
In November of last year the Republicans had sweeping victories in the House and made great gains on the Senate side. They won primarily by talking about health care reform, but also about runaway spending and the national deficit. This significant gain in momentum, however, is beginning to wane as the Republicans, like so many before them, began displaying signs of arrogance – especially by isolating themselves with their polarizing positions. The electorate spoke loudly about the issues mentioned above and the Republicans seemed to have forgotten that winning isn’t about them – it’s about the people who voted for them. There are so many Republican Presidential candidates already, with more to come, that we’re betting that the person who wins the primary won’t necessarily be the person who presents the strongest legislative program but rather the person who is perceived to be the one who “cares”. The problem for the Republicans is that their candidate must win their primary first, and with the size and the vocalness of the Tea Party, it may require them to say one thing between now and next spring and something entirely different leading into the general election. This will provide significant fodder for Obama to remind the electorate of the inconsistencies and flip-flopping nature of the Republicans.
Here’s some advice to all of the candidates – find a way to relate to the electorate, letting them know that you understand their pain and that you have a plan to ease that pain. George Bush’s loss to Bill Clinton in 1992 turned out to be all about the economy. Who can forget, “It’s the economy, stupid.” The fact is that George Bush and the Republicans had a plan in place and within months of Clinton being elected the economy turned around. Everyone knows that the plan Bush had in place worked. The problem with Bush was that he couldn’t relate to the people, nor was he able to explain things very well, and as a result he lost the election. It will be interesting to see if the advisors remember these lessons from the past, or whether they continue to think it’s all about the candidates.
· The maximum salary subject to Social Security tax for 2011 is $106,800. This covers 85% of all earnings from U.S. workers. Many people advocate taxing 100% of wage income just as with Medicare, although the Medicare tax is significantly lower than the Social Security Tax. This year Social Security is 4.2% for individuals and is “matched” by 6.2% from the employers. Both will be 6.2% beginning in January 2012. In our opinion, raising this wage base is likely to be one of the solutions to solving the Social Security mess. (Source: Social Security Trustee Report)
· Last November the Federal Reserve Board announced that it was going to buy $600 billion of bonds which became known as Quantitative Easing Two (QE2). By now, the Federal Reserve may have actually purchased all of the bonds it intends to buy as there are only about two weeks remaining in the program. Back in November the yield on the Ten Year Treasury was 2.78% and today it is around 3%. The goal was to keep interest rates low and it appears it accomplished that. The question now becomes what happens going forward? The general consensus is that interest rates will begin to drift upwards, but others suggest a more dramatic rise may occur both because of the ending of QE2 and inflation. At some point, interest rates need to return to more “normalized” rates. This should not be perceived as negative, but rather as a positive example of how things are improving. (Source: Federal Reserve)
· The Dow Jones Industrial Average just recently celebrated its 115th year as a stock index. When the Index began it only had 12 companies. Today, there are 30. Only one of those original 12 companies remains a part of the Index today. Do you know which one it is? (Please see the end of the Bullets for the correct answer).
While the first four months of the year had been very strong, (in fact, it could be argued they were too strong), May was the first month since last August to show a decline in equity prices. That weakness continued during the first two weeks of June, albeit at a more rapid decline causing many to believe that a long awaited price correction is upon us. We have said for several months that the markets had gotten ahead of themselves and that investors could expect a pull back and perhaps even a correction. A correction is defined as a fall of more than 10%, but less than 20%, from the market top. These types of corrections are a normal part of a bull market.
The recent declines are neither unexpected nor unwarranted given the economic news. The first quarter GDP rose only 1.8% after adjustment, unemployment rates have risen above 9% once again, gasoline is near $4 a gallon (although it has declined a little recently), and real estate prices continue to fall. Add to that the earthquake, Tsunami, and nuclear meltdown in Japan, floods and tornadoes throughout the Midwest and the South, Euro debt, and continued tensions in the Middle East along with Northern Africa, and it is not surprising that nervous investors reduced their equity exposure.
Despite this litany of concerns, our forecast for the calendar year remains the same with the market finishing up between 8% and 12% for the year. Through June 15th most of the major Indexes remain in positive territory for the year. We believe the bull market will continue in equities and what we are experiencing today is a healthy correction, not an end to higher stock prices. Corporate profits are at record highs, interest rates at record lows, and the world economy continues to expand; faster in emerging countries than in developing countries, but all are expanding. While the expansion is not occurring as quickly as we would like, it is growing at a self sustainable rate, leaving the longer term trend for equity investors positive as of now. Unfortunately that will not protect us from declining valuations in the near term. It could prove to be a long hot summer for investors; fortunately we are invested with an eye well past one or even two quarters. No one has timed the market successfully and unless the fundamentals change drastically in the near term, we remain cautiously optimistic.