Investing Curiouscatblog

Blog

  • Global Economy Prospects Look Good But Also at Risk

    Fear returns

    The MSCI index of global stocks has fallen by over 15% since mid-April. Treasury yields have tumbled as investors have fled to the relative safety of American government bonds.
    …
    Fears are growing that the global recovery will falter as Europe’s debt crisis spreads, China’s property bubble bursts and America’s stimulus-fuelled rebound peters out.
    …
    Fears about the fragility of the global recovery are exaggerated. Led by big emerging economies, the world’s output is probably growing at an annual rate of more than 5%, far swifter than most seers expected.
    …
    America’s structural budget deficit will soon be bigger than that of any other OECD member, and the country badly needs a plan to deal with it. But for now, lower bond yields and a stronger dollar are the route through which American spending will rise to counter European austerity. Thanks to its population growth and the dollar’s role as a global currency, America has more fiscal room than any other big-deficit country. It has been right to use it.

    The world is nervous for good reason. Although the fundamentals are reasonably good, the judgment of politicians is often unreasonably bad. Right now that is what poses the biggest risk to the world economy.

    Some very good thoughts from the Economist. As always there are plenty of risks to focus on today. There are also plenty of reasons to be optimistic. It looks like globally we are in for a good economy in 2010-2011 but those prospects could worsen fairly easily.

    Related: India Grew GDP 8.6% in First Quarter – Consumer Debt Needs to Decline Much More – Government Debt as Percentage of GDP 1990-2008 – USA, Japan, Germany…

  • Unemployment Rate Drops to 9.7% But Job Gains Disappoint

    Total nonfarm payroll employment grew by 431,000 in May but that total includes the hiring of 411,000 temporary employees to work on Census 2010, the U.S. Bureau of Labor Statistics reported today. Private-sector employment changed little (+41,000). Manufacturing, temporary help services, and mining added jobs, while construction employment declined. Economists were predicting over 500,000 job gains (given the large number of temporary census hires).

    In order to substantially increase the job prospects going forward we need to average over 250,000 new jobs a month to make up for the lost jobs due to the credit crisis. The economy needs to gain about 125,000 jobs a month to keep up with population growth. The temporary census jobs help but those jobs are temporary so can’t be counted on for long term improvement in the job picture.

    The number of unemployed persons was 15.0 million in May. The unemployment rate edged down to 9.7 percent, the same rate as in the first 3 months of 2010. The unemployment rates for adult men stand at 9.8%, 8.1% for adult women and 26.4% for teenagers.

    In May, the number of long-term unemployed (those jobless for 27 weeks and over) was about unchanged at 6.8 million. These individuals made up 46.0 percent of unemployed persons, about the same as in April.

    In May, the civilian labor force participation rate edged down by 20 basis points to 65%. The employment-population ratio was about unchanged over the month at 58.7%.

    Among the marginally attached, there were 1.1 million discouraged workers in May, up by 291,000 from a year earlier. (The data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The remaining 1.1 million persons marginally attached to the labor force had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities.

    Manufacturing employment has risen by 126,000 over the past 5 months. Within manufacturing, both fabricated metals and machinery added jobs in May. Temporary help services added 31,000 jobs over the month; employment in the industry has risen by 362,000 since September 2009.

    Government employment rose by 390,000 in May. The Federal government hired 411,000 temporary workers for Census 2010, bringing total temporary census staffing during the payroll survey reference period to 564,000. Employment in state government excluding education decreased by 13,000.

    In May, the average workweek for all employees on private nonfarm payrolls increased by 0.1 hour to 34.2 hours. The manufacturing workweek for all employees increased by 0.3 hour to 40.5 hours. The average workweek for production and nonsupervisory employees on private non-
    farm payrolls increased by 0.1 hour to 33.5 hours over the month.

    Average hourly earnings of all employees in the private nonfarm sector increased by 7 cents, or 0.3 percent, to $22.57 in May. Over the past 12 months, average hourly earnings have increased by 1.9 percent. In May, average hourly earnings of private-sector production and nonsupervisory employees increased by 4 cents, or 0.2 percent, to $18.99.

    The change in total nonfarm payroll employment for March was revised from +230,000 to +208,000, while the change for April remained at +290,000.

    Related: USA Added 290,000 Jobs In April – Unemployment Rate Reached 10.2% (Nov 2009) – Another 663,000 Jobs Lost in March, 2009 in the USA

  • Buffett Expects Terrible Problem for Municipal Debt

    Buffett Expects “Terrible Problem” for Municipal Debt

    “There will be a terrible problem and then the question becomes will the federal government help,” Buffett, 79, said today at a hearing of the U.S. Financial Crisis Inquiry Commission in New York. “I don’t know how I would rate them myself. It’s a bet on how the federal government will act over time.”

    Berkshire’s investment portfolio included municipal bonds valued at less than $3.9 billion as of March 31, down from more than $4.7 billion at the end of 2008. The company had a maximum of $16 billion at risk in derivatives tied to such debt, according to the company’s annual report for 2009.
    …
    Buffett said last month that the U.S. may feel compelled to rescue a state facing default after the government committed $700 billion to bail out financial firms and automakers. “It would be hard in the end for the federal government to turn away a state having extreme financial difficulty when they’ve gone to General Motors and other entities and saved them,”
    …
    About $14.5 billion of municipal bonds defaulted in 2008 and 2009… Many those were securities backed by revenue from nursing homes, property developments and other projects without claim to government tax revenue.
    …
    Defaults by local governments with the power to raise taxes are less common. Jefferson County, Alabama, defaulted on more than $3 billion of bonds backed by sewer fees after the deals grew more costly in the wake of the credit crisis in 2008. Vallejo, California, filed for bankruptcy in 2008 after its tax revenue tumbled.

    Related: USA State Governments Have $1,000,000,000,000 in Unfunded Retirement Obligations – Buffett on Need to Reduce Government Deficits – Politicians Again Raising Taxes On Your Children

  • India Grew GDP 8.6% in First Quarter

    While Europe’s financial crisis continues India grew GDP by 8.6% in the first 3 months of 2010. China continues to grow quickly as do many emerging countries, including Brazil. India’s Q4 GDP grows at 8.6% y-o-y

    The 8.6 percent expansion in the fourth quarter of the fiscal year 2009/10 was broadly in line with a median forecast of 8.7 percent in a Reuters poll and lifted the annual average growth rate for the full fiscal year to a slightly better-than-expected 7.4 percent.

    India’s economy had grown 6.7 percent in 2008/09, and the Jan-March 2009/10 growth rate matches the revised data for the second quarter of 2009/10.
    …
    Manufacturing output grew 16.3 percent on year in the quarter as consumers bought more cars and other goods, while farm output grew an annual 0.7 percent helped by a good winter harvest. The government expects the economy to grow 8.5 percent in the current fiscal year that started on April 1 on the prospects of a better farm output and a global recovery
    …
    The farm sector, which forms nearly 17 percent of the economy but is dependent on monsoon rains, is expected to do well in 2011 as the weather office has predicted a normal monsoon for the country. Prime Minister Manmohan Singh last week said an annual economic growth rate of 10 percent is needed in the medium term to address the problems of poverty and malnutrition.

    Even as Singh aims for high economic growth, inflation has come to haunt his government and appears to be undermining its support base. Wholesale prices, the most closely watched inflation gauge in India, rose 9.59 percent in April from a year earlier amid the government officials claim that headline inflation had peaked.

    Headline inflation numbers have been consistently higher than the official forecasts. The wholesale price inflation vaulted above the RBI’s end-March 2010 inflation forecast of 8.5 percent in January and crossed the 10-percent mark in February.

    Although food price inflation has eased from its peak of 20 percent in December, it is still above 16 percent. Rising cost pressures are also dragging down the pace of manufacturing growth, as evidenced by a second-straight monthly decline in the HSBC Market Purchasing Managers’ Index in April. The rapid acceleration in the world’s second-fastest growing major economy after China is boosting consumer demand far ahead of what can be met by existing supply capacity.

    The economies of India, China, Brazil, Mexico, Thailand, Vietnam… are still a fairly small fraction of global GDP but their share continues to grown. And the next few years look to continue this trend. Keys to how quickly they grow their share of global GDP are avoiding bubbles (which then burst), avoiding excessive government debt, continuing to build strong infrastructure for continued development and to what extent growth slows in Europe, USA and Japan due to the credit crisis and excessive consumer and government debt.

    The emerging economies have done a good job avoiding the credit crisis failures visited by the large banks on the wealthiest economies but the dangers of slipping up are large and costly. The largest economies have lots of wealth even after allowing bankers and wall street to siphon off huge amounts for themselves. Less wealth economies will suffer much more than the wealthiest countries if they fall prey to the same political and economic failings. And those special interest (crony capitalism) favors are no less (I would say even more, in fact) likely in those countries than they are in the richest countries.

    Related: The Relative Economic Position of the USA is Likely to Decline – Easiest Countries for Doing Business 2008 – Why Investing is Safer Overseas

  • Increasing USA Foreign Oil Dependence In The Last 40 years

    In his presentation Mike Milken explores foreign oil dependence for the USA and presidential statements:

    President Richard Nixon (in 1974 with 36.1% of oil from foreign sources): “At the end of this decade, in the year 1980, the United States will not be dependent on any other country for the energy we need.”

    President Gerald Ford (in 1975 with 36.1% of oil from foreign sources): “We must reduce oil imports by one million barrels per day by the end of this year and by two million barrels per day by the end of 1977.”

    President Jimmy Carter (1979, 40.5%): “Beginning this moment, this nation will never use more foreign oil than we did in 1977 – never.”

    President Ronald Reagan (1981, 43.6%): “While conservation is worthy in itself, the best answer is to try to make us independent of outside sources to the greatest extent possible for our energy.”

    President George Bush (1992, 47.2%): “When our administration developed our national energy strategy, three principles guided our policy: reducing our dependence on foreign oil…”

    President Bill Clinton (1995, 49.8%): “The nation’s growing reliance on imports of oil… threatens the nation’s security… [we] will continue efforts to…enhance domestic energy production.”

    President George W. Bush (2006, 65.5%): “Breakthroughs…will help us reach another great goal: to replace more than 75 percent of our oil imports from the Middle East by 2025.”

    President Barack Obama (2009, 66.2%) “It will be the policy of my administration to reverse our dependence on foreign oil while building a new energy economy that will create millions of jobs.”

    See slides.

    Related: Oil Consumption by Country in 2007 – Google’s Energy Interests – South Korea To Invest $22 Billion in Overseas Energy Projects

  • Google’s Own Trading Floor to Manage the Cash of the Company

    Google has generated a large amount of cash due to the profitability of their business. It currently has $26.5 billion 3rd only to Microsoft and Intel of short term holdings of technology companies (though Apple likely should be considered as having higher cash holdings). Google’s Latest Launch: Its Own Trading Floor:

    Google’s trading room opened in January. The plan is to keep the war chest growing safely and ready to be deployed should the right mergers-and-acquisitions opportunities arise. The investment team has grown to more than 30 people, up from six three years ago. Many of the new arrivals are former Wall Streeters who left lucrative careers at Goldman Sachs, JPMorgan Chase, and other banks. The man in charge is Brent Callinicos, Google’s 44-year-old treasurer, who joined from Microsoft in 2007, back when Google had $11 billion in cash. “This isn’t fast money, this is patient money,” he says. His crew works in a recently remodeled finance building on the company’s corporate campus in Mountain View, Calif., complete with a rock climbing wall, massage chairs, murals of tropical sunsets, and bamboo wall panels.
    …
    After a couple years of cautious cash management at Google, Callinicos says he’s beginning to build a higher-risk, higher-return portfolio. Since last year he has pulled away from U.S. government notes and moved into corporate debt securities ($4.9 billion as of Mar. 31, up from $695 million the year before), agency residential mortgage-backed securities ($3.3 billion, up from $60 million), and foreign government bonds ($332 million, up from zero).

    The largest Google holdings are: cash 35%, corporate debt 18%, US agency debt 13%, residential mortgage backed US agency securities 13%, municipal securities 8%, US government notes 8%. For all the debt problems with government, consumers and corporations that followed advice of mortgage bankers to overly leverage themselves there are many companies that have much larger cash holding than every before. Google is one but many other companies have built up large cash positions as well.

    I have been a long term investor in Google and think it is a great buy now. I don’t see myself selling it anytime soon (maybe anytime at all). I do worry a bit about Google wasting the cash on buyouts they are tempted into due to huge amounts of cash on hand. Hopefully they will avoid such mistakes. I think they may well be better off paying a dividend but they seem apposed to that idea.

    Related: Google Posts Good Earning But Not Good Enough for Many – S&P 500 Dividend Yield Tops Bond Yield: First Time Since 1958 (Nov 2008) – Too Much Leverage Killed Mervyns

  • Retiring Overseas is an Appealing Option for Some Retirees

    Retiring overseas has been growing in popularity over the recent decades. A lower cost of living and health care systems that work are two of the big draws. Americans Who Seek Out Retirement Homes Overseas

    With life expectancies growing — and some pension plans diminishing — baby boomers are doing the numbers and concluding that moving overseas makes more sense than aging in place.
    …
    She said a minimum amount for a comfortable retirement in a number of appealing places — Cuenca, Ecuador, and La Barra, Uruguay, being two examples — would be about $1,200 a month.

    Mr. Holman said that if you purchased a home in Medellin, you could live quite comfortably on less than $2,000 a month. As time goes on, retirement hot spots change along with countries’ economic and political situations.

    Ms. Peddicord said she used to recommend Ireland, Thailand and Costa Rica, but no longer does. She cited the high cost of living in Ireland, the anti-foreign sentiments in Thailand, and the growing crime rates both within and outside of San Jose, the Costa Rican capital.
    …
    “In Panama, for example, your rent could be $1,500 a month for a two-bedroom apartment in a nice building in Panama City with a doorman and a pool,” Ms. Peddicord said, “or it could be $200 a month if you choose instead to settle in a little house near the beach in Las Tablas, a beautiful, welcoming region.”

    Lee Harrison, an American who retired to Ecuador several years ago and then moved in 2006 to Uruguay, said there were a wide range of financial issues to consider before making the leap to retire abroad.

    For example, he recommends that retirees maintain a bank account and credit cards in their country of origin as well as in their new country, to facilitate money transfer. He also said that retirees should investigate their home country’s system of sending pension money to retirees abroad, as well as their new destination’s ability to accept electronic bank transfers.

    Retirees also should request help from a tax adviser and make certain their move doesn’t trigger the need for a new will.
    …
    Financial considerations aside, advisers say that when making the decision to retire abroad, most retirees find that the journey itself is the reward.

    “I know lots of people who retired to one country and then decided to move again somewhere else but never back” to their home, Ms. Peddicord said. “I don’t know of anyone who has decided to move back full-time after having had a taste of living abroad.”

    Living overseas is something a significant portion of people in the USA have no interest in at all. But for those that like the idea there are appealing options with some strong benefits. At the same time you need to understand the significant change this bring to your life and plan for it I suggest visiting the location several times over the years – before you retire.

    Related: In the USA 43% Have Less Than $10,000 in Retirement Savings – Many Retirees Face Prospect of Outliving Savings – Saving for Retirement

  • Company Spotlight on Campaign Monitor by 37Signals

    Profitable and proud: Campaign Monitor

    we’ve managed to more than double our revenues and profits every year for the last six years. All without taking any outside investment.
    …
    The idea for selling our own software really came out of frustration more than anything else. We were designing email newsletters for a lot of our clients but couldn’t find the right tool for the job. After trying everything on the market, we built a simple app that let our clients manage their own newsletters. All our clients loved it and it created a nice new revenue stream for us.
    …
    Over the last six years we’ve gone from open plan, to all closed offices and then to a combination of both. I’ve paid close attention to the pros and cons of each layout, and I’m convinced that closed offices are the best layout for a software company.
    …
    The reason for this is fairly simple. It’s all about removing distractions. Jobs like software development, design and copywriting often require juggling lots of different things in your head at once.

    Very interesting article on successful entrepreneurship. I also appreciate the management ideas discussed which resonate with those I discuss in my management blog.

    Related: Small Business Profit and Cash Flow – Y-Combinator’s Fresh Approach to Entrepreneurship

  • Fiscal Irresponsibility Results from Financial Illiteracy

    Failing to pay for the deferred costs of current expenditures gets all those practicing credit card budget thinking in trouble. That includes lots of individuals. But it also includes many governments. They pay huge rewards to special interests and act like they think the cost doesn’t exist. Only an extremely financially illiterate society could elect so many of these people. We have not learned that in the modern financial economies financial illiteracy is a huge societal problem (along with scientific illiteracy).

    Padded Pensions Add to New York Fiscal Woes

    In Yonkers, more than 100 retired police officers and firefighters are collecting pensions greater than their pay when they were working. One of the youngest, Hugo Tassone, retired at 44 with a base pay of about $74,000 a year. His pension is now $101,333 a year.

    Such poor financial management by public sector organization (California is horrible also) are causing huge damage to those living in such poorly managed states.

    the cost of public pensions has been systemically underestimated nationwide for more than two decades, say some analysts. By these estimates, state and local officials have promised $5 trillion worth of benefits while thinking they were committing taxpayers to roughly half that amount.

    The use of public money for outsize retirement pay really stings when budgets don’t balance, teachers are being laid off, furloughs are being planned
    …
    Roughly one of every 250 retired public workers in New York is collecting a six-figure pension, and that group is expected to grow rapidly in coming years, based on the number of highly paid people in the pipeline.
    …
    Thirteen New York City police officers recently retired at age 40 with pensions above $100,000 a year; nine did so in their 30s.
    …
    Before Yonkers adopted a richer pension formula for police in 2000, for instance, it was told the maximum cost would be $1.3 million a year. But instead, the yearly cost is now $3.75 million and rising. David Simpson, a spokesman for the mayor of Yonkers, said pension cost projections were “often lowballs,” so the city could get stuck. “Once you give something, you can’t take it away,” he said.

    It isn’t complicated. So long as you elect people that are financial illiterate and only care about granting favors to special interests, not the consequences of doing so, you are setting yourself up for a great deal of pain once your credit card bill comes due.

    Related: NY State Raises Pension Age to Save $48 Billion – Charge It to My Kids – Bogle on the Retirement Crisis – Politicians Again Raising Taxes On Your Children

  • Mortgage Foreclosure Rate Reaches Record 4.63%

    The fallout of the credit crisis continues. The delinquency rate for mortgage loans on one-to-four-unit residential properties increased to a seasonally adjusted rate of 10.1% percent of all loans outstanding as of the end of the first quarter of 2010, an increase of 59 basis points from the fourth quarter of 2009, and up 94 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey. The non-seasonally adjusted delinquency rate decreased 106 basis points from 10.4% in the fourth quarter of 2009 to 9.40% this quarter.

    The percentage of loans on which foreclosure actions were started during the first quarter was 1.23%, up 3 basis points from last quarter but down 14 basis points from one year ago.

    The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the first quarter was 4.63%, an increase of five basis points from the fourth quarter of 2009 and 78 basis points from one year ago. This represents another record high. The combined percentage of loans in foreclosure or at least one payment past due was 14.0% on a non-seasonally adjusted basis, a decline from 15.0%.

    The serious delinquency rate, the percentage of loans that are 90 days or more past due or in the process of foreclosure, was 9.54%, a decrease of 13 basis points from last quarter, but an increase of 230 basis points from the first quarter of last year.

    “The issue this quarter is that the seasonally adjusted delinquency rates went up while the unadjusted rates went down. Delinquency rates traditionally peak in the fourth quarter and fall in the first quarter and we saw that first quarter drop in the data. The question is whether the drop represents anything more than a normal seasonal decline or a more fundamental improvement. Most importantly, the normal seasonal drop is coming right at the point where we believe delinquencies could potentially be declining and the problem for the statistical models is determining which is which,” said Jay Brinkmann, MBA’s chief economist.

    “The seasonal models say it is not a fundamental improvement and that the seasonal drop should have been larger to represent a true improvement, hence the increase in the seasonally adjusted numbers. Yet there is reason to believe the seasonally adjusted numbers could be too high. Simply put, fundamental market factors may be having a greater influence on the delinquency rates than is normally the case, but mathematical models have difficulty discerning the difference over a short period of time.

    “Since discerning what represents a fundamental improvement versus a simply seasonal improvement is probably more of an art than a mathematical science at this point, the seasonally adjusted numbers should be viewed with a degree of caution.

    The seasonally adjusted delinquency rate increased for all loan types with the exception of FHA loans. On a seasonally adjusted basis, the delinquency rate stood at 6.2% for prime fixed loans, 13.5% for prime ARM loans, 25.7% for subprime fixed loans, 29.1% percent for subprime ARM loans, 13.2% for FHA loans, and 8.0% for VA loans. On a non-seasonally adjusted basis, the delinquency rate fell for all loan types.

    The foreclosure starts rate increased for all loan types with the exception of subprime loans. The foreclosure starts rate increased six basis points for prime fixed loans to 0.7%, 17 basis points for prime ARM loans to 2.3%, 18 basis points for FHA loans to 1.5%, and 8 basis points for VA loans to 0.9%. For subprime fixed loans, the rate decreased nine basis points to 2.6% and for subprime ARM loans the rate decreased 39 basis points to 4.3%.

    Predicting is much harder than explaining past data. But I believe the odds for better reports on foreclosures and delinquencies over the next 12 months. Delinquencies may well rise. But it is certainly possibly things will get worse. And if the jobs added each month doesn’t average close to 200,000 things will likely not be very good. My guess is we will add over 2.0 million jobs in the USA in the next 12 months but that is far from certain.

    Related: Real Estate and Consumer Loan Delinquency Rates 1998-2009 – Another Wave of Foreclosures Loom (July 2009) – Nearly 10% of Mortgages Delinquent or in Foreclosure (Dec 2008)