That Was The Week That Was-3rd Week March

 

Monday Brings the Euro Zone Problems to US Markets. An unprecedented bank-deposit levy on Cyprus savers sent European markets lower as investors ran for the safety of the dollar, and out of oil, Asia stocks and the Euro. Chris Weston, chief market strategist at IG Markets, said that we should look for traders to begin to position themselves more aggressively for the expected pullback. The US markets will be ugly at the open. The EuroZone has been relatively quiet until the recent levy on bank deposits. This is the first time that citizens have been taxed to pay for the European bailout. It may be a possible policy mistake, said Morgan Stanley strategists in this morning’s WSJ.Gold was up in overnight trading while the Euro was down against the dollar. Here we go, again. About the same time last year we saw something similar.

Bruce Feinberg, CPA, sent me his firm’s recent newsletter and in it there was an article on Charitable Gift Annuities, and how families can use them to provide good works after they are gone and income for themselves while they are here. The implementation of a CGA is fairly straightforward and should be considered only if the individuals (1) Understand that once established the CGA is engraved in stone (2) Have other assets in which income is derived (3) Families and heirs are all on the same page with the gifting arrangement. Advantages to the family by establishing a CGA are a higher than expected return on their savings than current bank or certificate of deposit rates since part of the income received would be principal and then earnings. The charity benefits by forgoing large upfront donation in return they can expect a fairly substantial gift upon the donors passing.

The mechanics begin when a family, or an individual, buys an annuity and uses the income during their lifetime and after their passing the monies in the account are bequeathed to the named charity. Usually these accounts are established with the help of a financial planner. Before  establishing a CGA the family should do some homework on the charity and most importantly on the financial health of the insurance company issuing the annuity. It would be a shame to invest in a poorly rated insurance company that could not comply with the long-term aspirations of the family and charity. A tip of the hat to our friends at Plotnik, Feinberg & Associates, PC.   Individuals and families interested in more information on Charitable Gift Annuities please call me.

What’s Driving Markets Higher? According to Mitch Zacks there are 3 reasons:

1. U.S. jobs numbers keep getting better.
2. Hugo Chavez Oil Prices. On his passing oil fell 10% signaling the new political risk in Venezuela may be passing. Also U.S. production has ramped up and our foreign dependence has decreased.
3. Mario Draghi, head of the European Central Bank, is serious about keeping rates low and also signaling cross-border flows of capital. As the EU crisis has slackened our markets have boomed.

On the flip side…

 

‘Mish” Shedlock, writing for Dow Jones publications, penned, ‘the jobs picture is far worse than they look.’  The economy saw a huge increase in part-time workers- some 446,000-what that means is between the full time hires –170,000- and the part-time there was a loss of 275,000 jobs! Almost 11% of those that took part-time work wanted full time. The reason is, according to Shedlock, Obamacare. A full time job is now described as working 30 hours. The survey’s show that more people are working multiple jobs. Which translates to the jobs report showing the same people working, only working two or more jobs. ‘Wait for the numbers to be recalculated,’ writes the Shed.

Don’t Fight The Fed! Remember Alan Greenspan and when Fed Chief he raised interest rates every time he changed his socks, or so it seemed. Indeed, he was a busy boy in 1994 and large money managers have long memories. That means several, probably more, large money managers, are buying investments now that will pay off well when rates rise. Some managers believe that there could be a fifty basis point jump before they get all their assets out of the fire. That’s a big loss. As rates rise principal falls. BlackRock, Pimco and TCW, are just a few of the big names getting set for the day. So what are they buying? Floating rate bank loans and TIPs are two of their favs.

Markets Up Monday. The Dow climbed 50 points and all indices chimed in. Whispers of a correction around S&P 500 numbers of 1560-64. Monday S&P 500 index closed at 1556. The state of Illinois, sez the SEC, hid pension troubles and mislead investors. The SEC charged the state with security fraud, marking only the second time in its history that it filed against a state! Illinois has one of the most underfunded pension systems in the U.S., according to the WSJ. In an independent report to the state of Illinois actuaries, hired by the state, warned that the system was so underfunded that it would likely never be able to afford the level of contributions to reach 90% funded. Those concerns were never disclosed to investors in bond offerings, noted the SEC. The SEC is concerned only with investors and securities fraud. Those looking forward to pension income from the state, that may or may not be there, is an entirely different story. Those folks are on their own.

Tuesday Markets Off-Across the Board. John Nyaradi writes for Dow Jones and reports that the ‘panic’ buying he is seeing is signaling a market top. Overall experts agree that the current rally has been due to the Fed keeping rates near zero while continuing to provide liquidity by buying plenty mortgages and bonds at the long-end. Nevertheless, according to Nyaradi, the charts suggest that a sell-off is in the cards no matter the power of the Fed. Lemme ask, ya’ll want to invest with a hedge fund? Seems that the private equity folks have run out of cats to skin and have opened their doors to allow in us regular folks. Now Carlyle Group has opened its arms and for $50,000 you can, if you have a $1 million net worth, buy into their new fund. Due to the uncertain future of pension funds, in the past a huge source of moola for private equity, now hedge-fund eyes have been cast to the masses. The WSJ, almost touting for the house wrote, ‘while risky, have the potential to be more lucrative than stocks and bonds.’ This is true and I don’t want to dash cold water on the possibility of riches, but certainly not an investment for those of conservative bent. Or, one could simply buy shares in several public private equity firms and share the wealth…or not.

So How Much is Left in The Tank for Bonds? Here are some eye-popping facts I dug up while looking for other stuff:

• Interest rates peaked in 1981
• Not since 1871 have rates been this low. Ever.
• Since 1790 the U.S. has never been able to borrow this cheaply (the long-30-year).
• The gain left in the long-bond from here to ZERO is 17%.
• Since principal reacts inversely to rates imagine what would happen to long bonds if a repeat of 1994 where rates hiked 240 basis points in 9 months? You’d lose about 25% of your principal.
• There is more risk than return left in bonds and translates that it is not an investors market but a traders market.

 

In Case You Forgot- The Markets Tend to Disappoint The Greatest Number of People at The Most Inappropriate Time.

And Wednesday Markets barely eked out a gain. It was a slow day and gold finished off a bit and oil up. JP Morgan raised Q1 economic growth forecast and I think a lot of that had to do with oil and imports. Our oil imports are expected to fall to just 32% of consumption  reported the Department of Energy. Just in 2005 it was 60%. With natural gas at $3.70 btu, a third of the European price and a fifth of the price paid in Asia, our energy production looks fine. So nice that it has kept inflation subdued and may cut the energy-import dependency and add 2 points to our future GDP. The other beneficiary of our stronger domestic energy business is a stronger dollar. While hurting exports it’ll help you, me and the candlestick maker by allowing our dollars to buy more.

Apple Goes On Defensive… Phil Schiller, marketing chief Apple, said the Android software is inferior to Apple’s and as such Samsung’s phone is inferior to the Apple iPhone. He gives an example saying that with Android you need nine accounts with different vendors that don’t all work together to get the same experience as with an iPhone. The reason for the bigger display is that the Android phone needs a bigger battery to keep the same life as does the iPhone. On the other side someone wrote about the new Chrome notebook from Google, which is basically a Samsung product, saying at $250.00 it’ll take biz from the tablets. Go get ‘em, Phil.

But….Apple lost its bid to quash Mexican name ifone, saying the name expired. A judge in Mexico said, ‘No.’

I have a Kindle and an iPad. The iPad loads faster, has lots more battery life, outstanding array of both free and for sale apps. Plus if I’m reading a book on my Kindle and the battery runs down I can pick up my iPad and pick up reading the same book where I left off on my Kindle. Since when is cheaper better?

The S&P 500 Index Topped @ 1563 Thursday. Some analysts believe that 1565+ the markets may stall. This would coincide with reaching an all-time high for the index. In any case a better jobs report boosted the Dow 83 points, Oil Up and Gold even.

JP Morgan & Goldman Sachs show weakness in their capital plans. In other words too big to fail have flaws- too big for the government regulators to ignore. Banks want to start buying back shares, hike dividends and this puts a kibosh in their plans. Regulators noted that JP Morgan’s CEO Dimon intentionally withheld investment bank profit and loss data from federal regulators. He knew of large losses, manipulated data and ignored warnings from traders. This came after examining 90,000 documents, 50 interviews and listening to 200 phone conversations. Hubris, Jamie, never got you anywhere. Wondering at Markets whether the banking Sun God will get his comeuppance.  Shares in Amazon fell as JP Morgan cut rating and new price at $300.

Jimmy Cramer said that even if the Fed throws a ‘Monkey wrench’, into the markets he thinks stock values from this point are too attractive. Hedge Funds have been buying stocks even as the average investor, this past week, has been selling and moving into less ‘troubled waters’. Still Cramer is long stocks and believes ‘shrewd’ investors are long stocks. Friday saw markets give up a bit. They ended off their lows, which says maybe this rally since last year ain’t over yet. Bank of America Merrill Lynch analysts said that last year markets were up 11% at the same time of year before giving it up. But things may be different this year. Cramer said that it may all end badly but while it lasts you’d be nuts not to try and benefit from it. Timothy Bassett CFP at Talmer Bank, reported that interest rates on the 10-year are at 2% and he reports that he doesn’t see rates making a dramatic run even if equities correct.

Natural Gas is Cheap …

However a surprise demand and tighter supply has seen prices climb 9% in March, reports Myra P. Saefong. Supplies are getting tighter while demand is increasing, said Kevin Kerr, president and chief executive officer of Kerr trading. There are 40% less drilling wells for gas in 2013 than there were in 2012. As housing grows and business demand grows there is concern over the lower levels of gas storage in over three years and bigger than usual declines in gas production. The price of NG can be seen in the above Yahoo.com charts with the natural gas ETF UNG. Investors who own the energy funds will also benefit from this coming price increase.

Concerned Which Way The Markets? You could watch the banks by having the financial ETF on your computer screen and keeping tab as the financials have lead the rally in 2013. There are 40 Financial ETFs but one that has all the big boys in the top 10 of their holdings is the SPDR Financial Select Sector ETF –XLF. The XLF closed up 9 cents Friday.

Questions call Paul at 586 295 0430 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.

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