Weekly Commentary September 30th, 2013

The Markets

“It’s déjà vu all over again,” Yogi Berra reportedly said as he watched Yankee teammates Mickey Mantle and Roger Maris smack back-to-back home runs for the umpteenth time.

Americans are experiencing déjà vu all over again, too. Sure, the prospect of another fiscal showdown doesn’t electrify a crowd like a couple of major league home runs. All the same, investors’ response to the possibility the U.S. government might partially shut down on October 1 was muted. Some U.S. stock markets gave back a little for the week; others moved higher. All remained up year-to-date.

So, are investors confident America’s elected officials will do the right thing? Or, have they become complacent? Are they so accustomed to debate and delay that it doesn’t faze them? According to The Economist:

“[U.S.] Federal spending comes in two types: discretionary which must be authorized every year; and mandatory which is set in law. These labels are confusing because much discretionary spending is anything but: it includes funding for the justice system and defense. Since 1976 Congress has required itself to pass a dozen appropriations bills annually to cover this stuff. Unfortunately, it has missed its deadline every year since 1994. To keep the lights on it has resorted to temporary resolutions to finance discretionary spending at existing levels until agreement can be reached, sometimes after a brief pause for effect.”

As it turns out, government funding has expired 10 times since 1981, and the government has closed down each time. Nine of the 10 closures occurred over weekends so they had limited impact. The tenth lasted for 21 days during 1995 and 1996. We should learn how this round will turn out pretty quickly.

merit-based systems are all the rage… One definition for ‘merit’ in the Merriam-Webster Dictionary is: Character or conduct deserving reward, honor, or esteem (also: achievement). If someone performs well, we want to reward them. If they don’t, well, maybe we won’t.

Merit-based systems are everywhere. For companies trying to retain top talent, recognition and rewards systems are essential. Almost 83 percent of employers use merit raises, according to the Compdata BenchmarkPro 2012 survey. In 2012, the average worker pay increase for merit was 2.7 percent. That’s expected to increase to 2.8 percent for 2013.

Corporations aren’t the only ones who tie pay to performance. In some school districts, teachers’ income is linked to student performance, and about 20 percent of state aid for undergraduate students is tied to achievement in the United States. Under the Affordable Care Act, the income of public and private hospitals will be tied to performance measures such as patient outcomes and cost containment. Earlier this year, hospitals in New York City negotiated with physicians unions to link doctors pay to performance, too. A study published in The Journal of the American Medical Association in September found providing financial incentives to clinicians for achieving better health outcomes was effective over the short term.

One tricky thing about merit-based pay systems is deciding how to measure performance. According to The Wall Street Journal, CEO pay may be measured against a variety of benchmarks:

“Compensation awarded to CEOs of 300 U.S. companies rose a median 3.6% to $10.1 million, the analysis found. The total includes salary and annual bonuses, plus the value of restricted stock and stock options at the time they were granted… CEO pay increased slightly faster than profit which rose 2.1% at the companies surveyed. But, it lagged behind the median 14% increase in total shareholder return for those companies which includes share-price movement and dividends.”

The article reported investor influence exercised through ‘say-on-pay’ votes – annual non-binding votes on CEO pay – has inspired greater consistency in CEO pay. In fact, for the first time in the history of the survey cited, the largest piece of the CEO pay puzzle was linked to financial or stock performance.

 

Weekly Focus – Think About It

“Success consists of going from failure to failure without loss of enthusiasm.”

--Winston Churchill, British Prime Minister

Weekly Commentary September 23rd, 2013

The Markets

We’re going to do it…We’re going to do it…We’re not going to do it…Yet.

Last week, the U.S. Federal Open Market Committee gave stock markets a gift that, on a scale of thrills, might have been on par with Marilyn Monroe singing happy birthday to JFK. On Wednesday, the FOMC announced (without a trace of breathiness):

“Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.”

The ensuing euphoria pushed many of the world’s stock markets higher. The Dow Jones Industrial Average set a new record, Germany’s DAX closed at a new high, and Japan's Nikkei delivered its best performance in eight weeks. Emerging markets also reaped positive benefits.

The Quantitative Easing  or QE-sugar buzz abated when St. Louis Fed President James Bullard told Bloomberg the Fed may decide to begin buying fewer bonds at its next meeting in October. This surprised some as analysts already had predicted it wouldn’t happen until December which caused markets to slump a bit last Friday.

It’s possible that, by mid-October, the Fed’s ‘lather-rinse-repeat’ commentary on quantitative easing may have become background music for another event that has the potential to deliver a macroeconomic jolt: the U.S. congressional debate over the debt ceiling.

There’s some good news and there’s some bad news… The good news is the rate of global gross domestic product (GDP) growth increased during the second quarter, according to The Economist. Greater economic strength in developed countries helped push the world’s GDP 2.4 percent higher during the second quarter of 2013 as compared to the second quarter of 2012. That’s only the third time that has happened in three years. The bad news, according to The Economist, is:

“The world is dangerously dependent on China… Since the beginning of 2010 it alone has contributed over one-third of global GDP growth, with another 40% coming from the rest of the emerging world. Weighed down by debt since the financial crisis, the rich world’s growth has been sclerotic. Excluding America, it has provided just 10% of global growth since 2010; America has contributed another 12.5%.”

China’s GDP has been growing at a pretty fair pace although the rate of growth has slowed. Forbes reported China’s GDP grew at an annualized rate of 7.5 percent during the second quarter of 2013, falling just short of first quarter’s 7.7 percent growth. The slowdown was expected. China is rejiggering its economy in an effort to stimulate domestic demand and consumer spending rather than continuing to rely on investment-driven growth.

Here’s another tidbit to consider. Forty percent of the world’s growth has been attributable to emerging markets (ex-China). Changing expectations for U.S. monetary policy have interrupted the flow of capital into those markets. The Economist’s Capital Freeze Index, which assesses the vulnerability of emerging markets to a freeze in capital inflows, found that nine of 26 emerging countries examined are at relatively high risk of this happening. That has the potential to affect the world’s GDP growth rate, too.

 

Weekly Focus – Think About It

“Our prime purpose in this life is to help others. And if you can't help them, at least don't hurt them.”

--Dalai Lama, spiritual leader of Tibet

Weekly Commentary September 16th, 2013

The Markets

Baseball great Yogi Berra once said, “In theory there is no difference between theory and practice. In practice there is.” He may have been on to something.

Last May, Fed Chairman Ben Bernanke introduced the idea the Fed's economic stimulus program, known as Quantitative Easing (QE), might be ratcheted down sooner rather than later. The concept, that easy money – the Fed has injected about $2.75 trillion into financial markets during the past five years – could soon be behind us, threw global markets into a tizzy.

Expectations that interest rates in more developed economies would move higher as QE tapered off caused investors to pull money from emerging markets (where many had sought higher returns). This created challenges in emerging countries with large current account deficits (deficits that occur when total imports exceed total exports, making a country a debtor nation).

So, what will happen when the Fed actually begins to buy fewer bonds? Pundits are mixed in their opinions. Some believe markets may become more volatile; others believe markets have already factored in the effects of tapering. In August, the Financial Times described it this way:

“The beginning of the end for QE matters greatly as for the past five years central banks led by the Fed have actively encouraged investors to pile into risky assets. With QE suppressing interest rates and more importantly, the volatility of prices, investors duly obliged and sought risky assets. Now with the Fed thinking about reversing some support, this summer’s turmoil may be a taste of what is coming in the form of higher long-term bond yields and market volatility. Some will argue the Fed’s taper is pretty much reflected by the sharp rise we have seen in long-term Treasury yields since May.”

We’ll know more when the Federal Open Market Committee announcement is made. Over time, however, it may not be all that easy to quantify the effects of more accommodative monetary policy in the United States, if that’s what the Fed chooses to do this week. There are other flashpoints that could affect markets, as well, including economic stressors in emerging markets, decisions on Syria, and upcoming Washington budget battles.

exploring the internet of everything… Before you read further, you may want to cue the music to Hanna Barbera’s space age cartoon, The Jetsons. The Internet of Everything (a.k.a. The Internet of Things) seems to be bringing the world closer to a reality where your refrigerator can order groceries, your smartphone can start your car, and tattoos only show when you want them to be seen. Two of the keys to connecting everyday things to each other and to the Internet are radio frequency identification (RFID) chips and Near Field Communication (NFC) systems.

RFID chips are all around us. Companies use them to manage inventories, farmers use them to track livestock and, in Boston, commuters use 3D-printed, chip-embedded rings to pay for mass transit. If you’ve traveled overseas recently, you probably used an RFID chip. Newer American passports have chips embedded to make it easier for Homeland Security to read them. In addition, contactless smart credit cards, which rely on chips and pin codes, are the standard across most of Europe and much of South America and Asia. As a result, Americans who try to use credit cards that have magnetic stripes and require signatures sometimes face challenges when trying to pay for goods abroad.

NFC is short-range wireless communications technology that may be best known for making it easier to pay for things with your smartphone or tablet. According to Venture Beat, an online magazine that focuses on the role of technology in daily life, one of the most powerful applications of NFC technology may be tag writing and reading. How does it work? Imagine this:

“When you arrive at home you will hold your phone up to the NFC tag embedded in the door. This will turn the electronic lock, opening the door, but it will also switch your phones to “home mode,” enabling it to use your home Wi-Fi network and launching an app that connects to your home server to turn on the lights. Heading to the kitchen, you might then put your tablet next to the stovetop to begin cooking the evening meal. NFC tags in the tablet and stovetop recognize each other, the tablet starts up the recipe app with instructions on cooking tonight’s dinner. At the end of the evening, you’ll place your device on the bedside table and the proximity to another tag will bring up the clock/alarm app.”

Just think. Someday, the Internet of Everything may even include Jetsons-style flying cars. 

 
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Weekly Focus – Think About It

Ideas are like rabbits. You get a couple and learn how to handle them, and pretty soon you have a dozen.

--John Steinbeck, American writer

Weekly Commentary September 9th, 2013

The Markets

Confluences are the building blocks of the world’s waterways. When two or more rivers meet, changes in velocity and turbulence tend to result in geologic scouring; erosive activity that may alter the shape of the river and its bed. The action may produce a ‘scour hole’ downstream from the confluence. For a river runner, a hole creates “potential for trouble and the need for deft maneuvers.” America may be heading toward a scour hole that is being shaped by a confluence of factors and events, domestic and global, economic and demographic.

Several of these factors were highlighted by last Friday’s employment report which showed unemployment has fallen to 7.3 percent. This may seem like a positive development until you realize just 63 percent of working-age Americans have a job or are looking for one. According to The Washington Post, that’s the lowest workforce participation rate in 35 years.

The change in American employment is rooted in the Great Recession and relatively slow pace of economic recovery, as well as a confluence of demographic trends. Younger Americans of working age are staying in school longer before looking for a job. In addition, and perhaps more importantly, the Baby Boom generation has begun to retire at a rate of about 10,000 a day or 300,000 a month, according to PBS NewsHour.

America’s changing employment picture may be a significant challenge to economic growth, but other factors will influence the shape of our future, as well. Congress returned from recess on Monday. They may not get to all of it this week, but their agenda includes determining: America’s response to Syria, the government’s operating budget, the debt ceiling, and funding for the Affordable Healthcare Act.

As if that weren’t enough, next week, the Federal Reserve will be making an important decision about tapering quantitative easing (which could be complicated by a potential government shutdown and debt ceiling expiration if Congress waffles).

We live in interesting times.

in 1835, in Democracy in America, Alexis de Tocqueville said:

“AMONG the novel objects that attracted my attention during my stay in the United States, nothing struck me more forcibly than the general equality of condition among the people... it gives a peculiar direction to public opinion and a peculiar tenor to the laws; it imparts new maxims to the governing authorities and peculiar habits to the governed… The more I advanced in the study of American society, the more I perceived that this equality of condition is the fundamental fact from which all others seem to be derived and the central point at which all my observations constantly terminated.”

One wonders what he would make of the difference in pay between lawmakers in various states today. A recent chart published in The Economist showed pay for state legislators ranges from nothing in New Mexico, where the median household income from 2007 through 2011 was about $44,600, to more than $90,500 in California where the median household income was about $61,600 during the same period.

If you believe having a greater number of legislators means the opinions of the masses are better represented, then it would seem citizens in states that pay lawmakers more are less well represented. The average number of legislators per million people in the 10 states that pay the most is about 22. In the 10 states that pay the least, it’s about 112 per million people. The exceptions appear to be Alaska, which pays about $50,000 a year and has about 82 legislators per million people, and Texas which pays less than $10,000 and has about 7 legislators per million.

The Economist pointed out lawmaking may be less costly in other ways, too, in states that offer lower salaries to policymakers. As it turns out, about one-third of state legislatures are part-time. States like Texas, Montana, Nevada, and North Dakota, where lawmakers meet every second year, tend to spend less than states where legislators meet more frequently.

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Weekly Focus – Think About It

“Democracy cannot succeed unless those who express their choice are prepared to choose wisely. The real safeguard of democracy, therefore, is education.

--Franklin D. Roosevelt, American President

Weekly Commentary September 3rd, 2013

The Markets

Last week was crunch time in the National Football League (NFL). With the 2013 regular season approaching rapidly, NFL teams cut about 700 players from their rosters over the Labor Day weekend.  That was a big cut—about a 40 percent drop in player employment—as rosters were pared from 90 to 53 players.  However, it’s not likely to have a significant effect on U.S. unemployment data—and that’s really what the week ahead is all about.

Last week, markets jittered and slumped on news that Syria was thought to have used chemical weapons against civilians. According to The New York Times, 70 percent of stocks that trade on the New York Stock Exchange finished Friday lower, and 73 percent of those listed on the NASDAQ lost value.

There were signs of renewed optimism on Labor Day. Although U.S. markets were closed, world markets responded well to news that there would be no immediate American military action against Syria. Encouraging economic data from China and Europe helped share prices, too, although it didn’t do much for government bonds, gold, or the Japanese yen.

Post Labor Day, investors will be anticipating employment data with the zeal of Seattle Seahawk fans decked out in their 12th man gear awaiting the opening kickoff at the Clink. The Financial Times, a British publication that has little interest in American football but great interest in U.S. Federal Reserve policy, put it this way:

“Members of the U.S. Federal Reserve open market committee will get their last pieces of information about the labor market before their all-important September meeting, which has been heavily trailed as posing the first real opportunity for the Fed to embark on a taper… The US economy has been recovering at a painfully slow but steady rate for more than two years now and with no sign of any step-up in the pace of improvement, the Fed policy-makers face a finely balanced decision.” 70 percent of New York Stock Exchange stocks closed lower on Friday, and

No matter what happens, emotions are likely to be running high this week.

sobering statistics and investment ideas sometimes go hand-in-hand. When one of America’s favorite fast food chains unveiled a new product in Japan, some people wondered how long it would be before this fine innovation — a three-quarter pound, 1100 plus calorie serving of potatoes called Mega Fries— would reach our hungry shores. Others deliberated on the ways in which higher consumption of nutritionally deficient foods may affect obesity rates and illness in countries around the world. They may even have done a Google search to ascertain which companies are working on cures for diabetes, developing treatments for heart ailments, or bio-engineering organ replacements.

A key measurement in evaluating the ill effects of diseases and health conditions is the Disability-Adjusted Life Year or DALY. According to the World Health Organization:

“One DALY can be thought of as one lost year of "healthy" life. The sum of these DALYs across the population, or the burden of disease, can be thought of as a measurement of the gap between current health status and an ideal health situation where the entire population lives to an advanced age, free of disease and disability…DALYs for a disease or health condition are calculated as the sum of the Years of Life Lost (YLL) due to premature mortality in the population and the Years Lost due to Disability (YLD) for people living with the health condition or its consequences…”

It’s depressing to note that mental disorders and drug and alcohol abuse are the biggest drivers of disability. They account for more than 7 percent of DALYs. That’s more than diabetes, HIV, or tuberculosis, and almost as many as cancer. Globally, in 2010, depression and anxiety were responsible for about 11 million lost years of healthy life in the 20- to 24-year-old age group. Drug use also appears to peak at about this age. The number of DALYs for depression and anxiety appears to decline with age.

Perhaps the best idea is corporate wellness programs. Research published by Harvard University in 2010, found that medical costs declined by about $3.27 for every dollar spent on wellness programs. In addition, the cost of absentee days decreased by about $2.73 for every dollar spent.

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Weekly Focus – Think About It

“When you are offended at any man's fault, turn to yourself and study your own failings. Then you will forget your anger.”

Epictetus, Greek Stoic philosopher