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Disclaimer: Information presented on this program is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Discussions and answers to questions do not involve the rendering of personalized investment advice, but are limited to the dissemination of general information and may not be suitable for members of the listening audience. A professional adviser should be consulted before implementing any of the strategies presented.

Recent Municipal Bond Volatility
Posted on Friday, November 12, 2010

Dear friends,
In case you did not see this in November, here it is. I just wanted to make a quick comment as the week closes on the recent volatility in the municipal bond market. What we are mostly seeing are past bets being unwound by traders that were hoping for a complete expiration of the Bush tax cuts. Clearly, munis are more attractive when taxes rise and some traders likely made that bet a while back by buying municipal bonds and expecting a nice price increase when the Bush tax cuts expired. Although we were in that camp as well, our long term outlook is still for higher taxes. In the short term, now that the Republicans have a new foot hold and Washington is a bit more balanced (like a drunk roller skater grabbing onto the roller rink railing) that trade might not look as good for a trader. Those who bought municipals to play this bet are likely the cause of the recent price pressure we have witnessed as they begin to sell. I see this as a temporary situation since most muni buyers are long term holders looking for the tax free dividends. This recent price movement has little bearing on our long term view of the muni market. Having said that, personally I believe that Obama will try to hang tough by raising taxes on people making more than 250k, also known as the wealthy (ha-ha). Given the fact that these folks are the biggest holders of muni bonds on the planet, it will likely spike muni bond prices up again in the near future.

Is keeping something you already have like getting something new?
Posted on Wednesday, December 15, 2010

Dear friends,
I just wanted to update you on the latest developments around the progress of extending the Bush tax cuts. The senate has overwhelmingly voted for leaving things in place and congress is likely to do the same. Click link for story:

The thing that I find interesting is how it is being "spun as stimulus". Yes, there are a few little extras in there like slightly lower social security taxes (for 12 months) and extended unemployment benefits but all in all, we are simply keeping what we already have. So I ask you, is keeping something that you already have like getting something new? With the holiday's approaching, I thought this might be an interesting experiment to try on my kids and see if it stimulates their attitudes and motivates them.

Imagine Christmas morning, the glow of a new day is peeking into my bedroom and my 4 year old is gently waking me by jumping on my private parts. He has already summoned my two older boys in a similar fashion who are patiently waiting by the tree next to the fireplace. The CD from the Charlie Brown Christmas special is softly playing in the background and everything is perfect, except there are no presents. I enter the room in my slippers and robe with my beautiful wife smiling by my side. As I sit on the couch with a big early morning groan, everyone wonders where their stuff is? "Boys" I say in a loving but firm tone "we are trying something new this year. Instead of giving you presents like in past years, we have decided not to take away the stuff that we gave you ten years ago. Merry Christmas guys".

This is not very different from treating the extension of the Bush tax cuts like a shiny new gift. I am not trying to be a Grinch or anything (humbug) but I hear many people talking about how this will stimulate our economy. Since we last spoke, the stock market is acting like unemployment has dropped, housing prices are rising and we have come up with some type of plan to get our financial house in order by reversing the spiral of debt that we are in. None of those things have happened. We did see some signs of life on Black Friday and Cyber Monday which might have some follow through but it also might be a sign that consumers are very price conscious and many folks who would never dream of shopping of Black Friday braved the crowds to save money. Time will tell.

So the next time the market rallies, and the wizards on Wall Street give you the reasons why (they always have the answers every day), just ask yourself if any of the issues that crashed the market in 08 have been resolved, specifically the collapse of the residential real estate market, credit being difficult to get even for qualified borrowers, corporations hoarding money and consumers trying to deleverage and saving record amounts (aka. Not spending). Until at least some of these issues get resolved, it is hard to justify any heavy weighting towards equities regardless of how bright the lights atop the slot machine are blinking and the bells are ringing.

Is gridlock good for the market?
Posted on Tuesday, November 2, 2010

Dear friends,
I thought the attached link from today's Associated Press might be of interest to you.

Although many of the issues that I raised in my last commentary are discussed in this article, I assure you that I had nothing to do with writing it. Having said that, it seems that many of the experts interviewed by the AP might have read my commentary from yesterday. Of course I am joking.

Gold, bonds and stocks all up. Is everyone right?
Posted on Monday, November 1, 2010

Dear friends,

Since my last commentary we have seen a bit of a pulse in the stock market, gold has continued to move up, and bonds remain in an upward trend as well. As great as that all may seem to the naked eye, these asset classes usually don't run in the same direction. Strong gold represents economic uncertainty and fear of currency devaluation. Rising bond prices occur when rates are expected to fall and/or when many buyers step in and drive up the prices, which has been happening all year. Stocks usually rise when expected future earnings and overall economic activity is predicted to be strong. All of these things can't happen at the same time, at least not for an extended period.

Given that everything seems to be moving up recently, let's first take a look at some numbers to put our short and long term memories in sync with each other. Since the beginning of this year, gold is up 22% and continues to look strong, bonds (i.e., 7-10 yr treasuries) are up 11.75% and the S&P 500 is up 3.66%. I find it interesting that most people think stocks are leading the way yet this is understandable since bonds and gold are rarely front page news and the media puts stocks front and center every time they sneeze.

So, who is right? Here are some things to consider to help you come to your own conclusions. Corporate held cash continues to be at record highs most likely because companies are not confident in spending their reserves on the usual things like expansion, hiring new employees and buying competitors. Also, after the credit market came to a screeching halt in 2008, many companies fear a similar situation occurring in the next meltdown and are keeping large supplies of cash on hand to be able to self sustain in the event that their credit lines are shut down again. As for our personal savings rate as a nation, that has also spiked from 0.8% in April of 2005 to 6% in June of this year signaling that consumers are very uncomfortable parting with their discretionary cash.

Also consider that all of this economic disaster began in 2008 with a collapse of the lending markets, which crashed the real estate market, which crushed the consumer spending spree (a.k.a. using your house as an ATM), which took the stock market out behind the woodshed. Most experts agree that real estates' recovery will be a crucial part of an economic recovery therefore we have to consider the shadow market estimated at over 600,000 foreclosures that have not even hit the MLS yet. In addition, we recently witnessed an attempt by the federal government to halt foreclosures based on some "half baked" claim that a bank could not collect the very asset their borrower legally and knowingly pledged if certain paperwork procedures were not followed in the administrative back offices. Banks are already overly cautious about lending so imagine how they feel now that the collateral on which they based those loan decisions is being threatened by their own government.

So who are these stock investors and what are they thinking? The first question is much easier to answer than the second. According to the data, the three buyers driving this most recent stock market move are institutional trading desks at major banks, hedge funds, and pensions. Individual investors continue to be net sellers of stocks and buyers of bonds and gold.

Why has the so called "smart money" recently started turning up the music? Who knows what goes on in the minds of traders, but several theories are likely: If Republicans win back the House and maybe the Senate, financially damaging laws like Obama Care (approved by only about 20% of voters), cap and trade tax, card check and a litany of others could be repealed or prevented from passing. Another theory is that the Bush tax cuts are more likely to be extended under a more balanced House/Senate where both sides are able to be heard. Also the Fed has recently announced more stimulus and that will supposedly get things going. Another possibility might be that recently some corporate earnings came out stronger than expected for Q3 which might mean corporations are ready to start spending and hiring. All of these sound great, so let's examine them a bit further.

Let's assume that Republicans take the House or the Senate or maybe both. This may very well stop the financial bleeding for any 2011 laws to be forced on the country but it is unlikely that a repeal of Obama Care is going to be an easy one. Also, the amount of damaging laws that could be forced through the system in the last two months of the year by Democrats could be mind boggling according to the experts.

How about extending the Bush tax cuts? On the surface, this might sound stimulative, but letting us keep something that we already have has no positive effect on our cash flow or our spending habits. A tax cut would be a different story, but even if the Republicans try to get one passed, Obama will likely use the word VETO so many times that we will start thinking he has a close Italian advisor with that name.

As for our friend Ben Bernanke and the gang at the Fed, repeated attempts to stimulate spending and borrowing have not worked and are unlikely to suddenly change in the future. The Fed is pretty much out of options in their tool box unless interest rates go negative and they start paying people to borrow. That would be cool and scary at the same time.

Lastly, some corporate earnings have come out better than expected which might be a hopeful sign that things are on the road to recovery. Incidentally, I am all for corporate earnings getting stronger and companies hiring more workers and spending more to make more money. Having said that, we need to determine where these earnings are coming from to determine if they are a reason to buy stocks. If a company's sales are growing and their customers are buying more of their products or services, and their profits are rising, these are all potential reasons to invest in stocks. On the other hand, if a company's sales are falling by 10% but they reduce their expenses by let's say 20% by firing a bunch of their staff, are their earnings really improving by 10%? Well, technically, yes, but as an investor this is not a very comforting scenario in determining the strength of a business. Most of the earnings "surprises" have been from companies cutting expenses, not growing their customer bases or market share. I am not saying in a strong economy that these companies will not benefit from their cuts, but without a recovery it won't matter and they will need to cut further.

Ultimately, we all have to make the call on who is right? Bond and gold buyers expecting more tough times ahead or the professional stock traders and pension managers that have started getting out on the dance floor. Time will tell but in the meantime, a portfolio dominated by short term, good quality bonds with a sprinkle of gold dust seem to be working well and contributing to a good night's sleep for many of us.

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