Watching China from afar...

Social Security Battle to be Won or Lost...

The part about big labor threatening investment firms with pulling Pension Funds if Labor’s position on the issue are not supported is just flat scary. DOL should definitely look into it.

The author’s position that Social Security reform is a political position to take; one to be won or lost is precisely the problem with Washington today.

What we need is good ideas, thoughtful debate and good public policy. If we get a combination of some of the reforms of the past (age of retirement, benefits, FICA tax wage ceiling) and private accounts WE ALL WIN.

That is the goal, solvency, certainty and stable policy that people can plan around to fund their retirement.

Bubble signs...

In markets were renting is at an extreme discount to the cost of ownership something is certainly awry.

Its been some time since my real estate courses but I clearly remember that before investing ones capital into home ownership, ownership had to be a good value relative to renting.

If not, the markets were not in balance and there was a risk that price gains would be limited.

I am not a real estate bubble, gloom and doomer, but in some markets the aggressive leverage and speculation probably have the markets overextended.

Once money is not so cheap, we will find out how overextended!

Answering the Myths about Social Security

A compact PDF with some concise reasons that reform needs to be addressed...Now.

USATODAY.com - PBS ending 'Wall $treet Week' after 35 years

It's an end of an era. Louis Rukeyser has long been gone and now the show will end in June of this year.

In the 70's and 80's Wall $treet Week was it if you were looking for weekly news, commentary and outlook. Now the financial news space is quite crowded with CNBC and numerous internet media outlets.

There have been some notable calls on the show over the years, I remember Martin Zweig calling for a "crash" in the weeks leading up to the October, 1987 stock market crash.

I am sorry to say that it has been years since I have watched, the world is just awash in financial news and commentary.

It's a little like bidding a old friend farewell.

At the same time...

The Investor Education fund was being chaired by Charles Ellis, CFA an esteemed member of our profession. However, it appears that there is no direction for this entity, and the people in the leadership roles are stepping down. This is unfortunate, because there are some significant issues with the lack of investor education and strong leadership is needed to bring some of these issues to the forefront.

More fines by NASD...

There's so much of this going on now, it's almost not news anymore. As long as the charges are hidden, these will be the products pushed on un-suspecting investors.

Interesting Paper on Crude Oil Prices

Link to PDF

Page two details six factors that have driven oil prices since the beginning of the Iraq War.

The major oil companies have been slow to put on additional supply to the extent that they have been burned in the past. The addition of investment in supply has lead to lower prices and lower return on investment. The longer this mind set persists the longer prices will remain stubbornly high.

The rise in net global demand is real but the major oil companies must grow to believe it will persist and build out capacity to meet it.

Treasuries Fall as Fed Raises Rates, cites Inflationary Pressure

Federal Reserve raises interest rates another 1/4 point

The FOMC met today and voted to raise the Federal Funds rate another quarter point. While "measured pace" and "symmetric risks" remain in the language of the release, we have mention of pricing power for the first time in a while and a mention, again, about inflation and energy prices.

To refresh readers and inform new readers, normally the Fed Funds rate is at a premium to the rate of inflation. Indeed, the average premium of Fed Funds over inflation for the last ten years is +1.63% which implies a Fed Funds rate of 4.5% to be "normal".

In several speeches over the past couple of months, Fed officials have wondered out loud whether or not if the "new" neutral rate is much, much lower. With the Fed Funds rate quickly approaching par with the rate of inflation we will all know when we see how aggressive the Fed is once the Fed Funds rate exceeds the rate of inflation.

Weekly Market Returns

The last week on Wall St. has been an ugly one with all of the major averages lower.

The strenght in energy prices continues to spook the market and send equity prices lower.

For the week the NASDAQ was down -1.7%, the DJIA -1.3% and the S&P 500 -.9%.

While some believe higher energy prices are here to stay, the market remains well supplied and prices are being driven by demand. The level of energy prices may not be the issue at this point but the trend. If we could stabilize at these levels and the economy continued to perform, maybe stocks could move higher.

Social Security Reform Part III

Today we were able to watch President Bush make his pitch for Social Security reform live on TV, as he was in Pensacola this morning.

While most of these types of town hall meetings are carefully staged, President Bush does a good job of 1. Addressing the issue and why it needs attention now and 2. Working to address the fears of seniors and those who have not managed their retirement accounts personally in the past.

The President is continuing to pitch the idea of reform and private accounts modeled on the Federal Government Employees thrift Savings Plan.

We continue to believe that many positive things have come from this debate. We watched Dr. Greenspan's testimony to Congress on several occasions of the last couple of weeks. If retirement security and national savings can be addressed in one fell swoop we will all be better off. Very quickly the public policy debate is moving away from if there is indeed a problem to the combination of policy changes to address the problems at hand.

Retirement savings is a morass of confusing options for the public. If we want to improve things we have to work towards a system that is simple, easy and automatic.

Weekly Market Returns

Inflation, interest rates, oil. All three weighted on the markets this week, in what unfolded as a broad decline.

For the week the S&P 500 was down -1.8%, the DJIA -1.5% and the NASDAQ -1.4%.

Popping Bubbles: 5th Anniversary of NASDAQ Peak

Today is the 5th Anniversary of the March 10th, 2000 the NASDAQ peaked at 5,132.52.

Soon after the market carnage ensued. Some people lost 60-70% of the value of their accounts.

Now that the bubble is past investors are older and wiser, right?

Right.

Bubbles, Manias, Panics and Crashes have been with us before and they will happen again. Greed and fear have not been repealed. History always has some new wrinkle that we are doomed to repeat.

Bubbles come and bubbles go and which is which some will never know.

Warren Buffett's letter to shareowners

As always it is a gem, worth a thorough read. Warren is still negative on the US dollar because the structural problems have not changed.

For the many investors who have given up on international investing, this is sage advice.

Until the structural problems of the trade deficit and budget deficit are rectified, the dollar will remain in decline.

Weekly Market Returns

The market moved sideways for the better part of the week, digesting higher oil prices and a weaker 10 year US Treasury.

Then Friday's employment report showing a 262,000 increase in non farm payrolls sent the markets sharply higher.

For the week the DJIA and the S&P 500 were up a strong .9% and the tech heavy NASDAQ was up .3%.

Energy and Materials stocks have lead the advance so far this year, for the bull to have legs the market leadership needs to broaden out. Pharmaceuticals and technology have lagged the overall market. Gains in sectors that have lagged would be a bullish sign.

Social Security Privatization & Galveston, TX Part II

Since our first post on this topic, lots of things have happened. Members have Congress have pronounced the "plan" dead on arrival, feedback here consists of either A. There is not a problem or B. Raising taxes will fix the problem, and final thing that has happened is that Dr. Alan Greenspan has chimed in on the topic.

First, there is no proposed legislation that could be dead on arrival. Only the idea that there is a problem and a panel of experts should be convened to explore possible solutions. Raising taxes is a painfully seductive solution and we argue that the rates needed will not provide the necessary revenue due to tax avoidance.

Today Dr. Greenspan appeared before the House Budget Committee. His prepared remarks can be found on the Federal Reserves Website.

While we encourage you to read the entire testimony, here are some excerpts:

Because the baby boomers have not yet started to retire in force, we have been in a demographic lull. But this state of relative stability will soon end. In 2008--just three years from now--the leading edge of the baby-boom generation will reach 62, the earliest age at which Social Security retirement benefits can be drawn and the age at which about half of those eligible to claim benefits have been doing so in recent years. Just three years after that, in 2011, the oldest baby boomers will reach 65 and will thus be eligible for Medicare. Currently, 3-1/4 workers contribute to the Social Security system for each beneficiary. Under the intermediate assumptions of the program's trustees, the number of beneficiaries will have roughly doubled by 2030, and the ratio of covered workers to beneficiaries will be down to about 2. The pressures on the budget from this dramatic demographic change will be exacerbated by those stemming from the anticipated steep upward trend in spending per Medicare beneficiary.

Read: Congress, act now while there is time.

I fear that we may have already committed more physical resources to the baby-boom generation in its retirement years than our economy has the capacity to deliver. If existing promises need to be changed, those changes should be made sooner rather than later. We owe future retirees as much time as possible to adjust their plans for work, saving, and retirement spending. They need to ensure that their personal resources, along with what they expect to receive from the government, will be sufficient to meet their retirement goals.

Thank goodness the man has the guts to say this kind of stuff and bring it to the forefront.

Our current, largely pay-as-you go social insurance system worked well given the demographics of the second half of the twentieth century. But as I have argued previously, the system is ill-suited to address the unprecedented shift of population from the workforce to retirement that will start in 2008. Much attention has been focused on the forecasted exhaustion of the Social Security trust fund in 2042. But solving that problem will do little in itself to meet the imperative to boost our national saving. Raising national saving is an essential step if we are to build a capital stock that by, say, 2030 will be sufficiently large to produce goods and services adequate to meet the needs of retirees without unduly curbing the standard of living of our working-age population.

Unfortunately, the current Social Security system has not proven a reliable vehicle for such saving. Indeed, although the trust funds have been running annual surpluses since the mid-1980s, one can credibly argue that they have served primarily to facilitate larger deficits in the rest of the budget and therefore have added little or nothing to national saving. In my view, a retirement system with a significant personal accounts component would provide a more credible means of ensuring that the program actually adds to overall saving and, in turn, boosts the nation's capital stock. The reason is that money allocated to the personal accounts would no longer be available to fund other government activities and--barring an offsetting reduction in private saving outside the new accounts--would, in effect, be reserved for future consumption needs.

We have a problem and private accounts should be considered as part of the solution.

While the debate continues and the Galveston example goes largely ignored by the main stream media it is popping up across the internet. You can find some recent items here:

Vanderbilt Torch: Private Accounts Earn High Returns

Social Security Alternative Already Working in Texas

Life Expectancy Continues to Increase

This is the crux of the problem with the current Social Security System. The demographic wave of baby boomers and the fact that people are living longer is going to break the bank.

While the news that people are living longer than ever is great news, structural changes to Social Security need to be made now so that they can live well.