Tag Archives: Gainesville

The Outlook for Yields

My Comments: Guggenheim Partners has recently been sending periodic macro insights about investments and opportunities for investors. Good stuff, so if investments interest you, I encourage you to grasp as much of it as you can.

global investingGlobal CIO Commentary by Scott Minerd of Guggenheim Partners – July 03, 2014

As U.S. economic growth gathers pace, yields on 10-year U.S. Treasuries should shift higher over the next two-three years, eventually moving as high as 3.25 – 4 percent.

While a broad-based secular increase in inflation will be a problem that comes most likely in the next decade, a number of technical and cyclical forces, such as healthcare and shelter costs, are working to push consumer prices higher over the next six months or so.

However, these forces are unlikely to spark sustained inflation in the near term, given that the U.S. unemployment rate is still quite high, the labor force participation rate has been on a downward trend for a number of years, and capacity utilization is still significantly lower than the threshold associated with a broad increase in consumer prices. In the medium-term, wage pressure will continue to rise and aggregate demand should improve. Rather than being the harbinger of an inflationary spiral many investors fear, that should be positive for economic activity.

Our research suggests that the yield on the U.S. 10-year Treasury bond should now be 3-3.25 percent, yet yields have been hovering around 2.6 percent. Keeping rates low in the near term are technical factors such as central bank accommodation flooding global markets with liquidity and some form of quantitative easing likely coming in Europe.

This week’s ADP report showing U.S. firms added 281,000 jobs in June, the most since November 2012, is the latest sign that the U.S. economic recovery is picking up steam. Over the next two to three years, given that economic growth is likely to be stronger, unemployment is likely to be lower, and inflation is likely to be higher, we will eventually start seeing fundamentals take over, resulting in higher yields on U.S. Treasuries. Assuming the U.S. Federal Reserve starts raising interest rates mid to late next year, we could see the U.S. 10-year Treasury bond reaching a cyclical high of somewhere around 3.75-4 percent.

U.S. Wage Pressure Approaching, But Not Here Yet

An improving labor market, brighter growth prospects, and higher capacity utilization are pointing to a U.S. economy approaching equilibrium. Historically, once the economy moves past equilibrium, whether defined by unemployment, output, or capacity, significant wage inflation tends to follow. Though we are drawing nearer to these levels, it is likely to take one year or longer before the gap is closed and broad-based wage inflation emerges.

Source: Haver, Guggenheim Investments. Data as of 7/2/2014. Note: We define the output gap using Congressional Budget Office (CBO) data on potential GDP, where the gap is the difference between actual and potential GDP as a percentage of potential GDP. We define the capacity utilization gap in the same way, using 82 percent as the natural rate. We define the unemployment gap using CBO data estimates of the natural rate of unemployment.

U.S. Data Points to Strong Second Quarter

• The ISM manufacturing index cooled slightly in June but remained well in expansion territory, inching down to 55.3 from 55.4.
• Personal Consumption Expenditures (PCE) rose less than expected in May, up 0.2 percent after April’s flat reading.
• The University of Michigan consumer confidence increased in June to the highest level this year, to 82.5 from 81.9.
• Pending home sales increased in May for a third consecutive month, rising by 6.1 percent from a month earlier, making it the best month in over four years.
• Construction spending rose for a second month in May but was below expectations, rising just 0.1 percent from April.
• Initial jobless claims inched down by 2,000 for the week ended June 21, to 314,000.
• Factory orders fell by 0.5 percent in May after rising during the previous three months.
• The core PCE deflator, the Fed’s preferred measure of inflation, rose in May for a third straight month, to 1.5 percent — the highest since January 2013.

China Manufacturing Positive, European Prices Muted

• Euro zone consumer prices rose 0.5 percent year over year in June, equaling May’s gain.
• Euro zone economic confidence unexpectedly declined in June to 102.0 from 102.6.
• Retail sales in Germany unexpectedly fell for a second consecutive month in May, decreasing 0.6 percent.
• Germany’s CPI accelerated to 1.0 percent year over year in June, the highest in four months.
• Spain’s manufacturing PMI rose to 54.6 in June, a seven-year high.
• The manufacturing PMI in the United Kingdom expanded to 57.5 in June, the best level this year.
• China’s official manufacturing PMI showed a faster pace of expansion for a fourth straight month in June, rising to 51.0.
• Japan’s Tankan survey of large manufacturers dropped to 12 from 17 in the second quarter. The outlook index, however, reached its highest level since 2007.
• Japan’s industrial production showed a small rebound in May, rising 0.5 percent after a 2.8 percent drop.
• Japan’s CPI climbed higher in May to 3.7 percent year over year, reflecting the recent sales tax hike. Core prices rose 3.4 percent, the highest since 1982.

According to the Supreme Court…

Corporations Have More Religious Freedom Than Taxpayers

My Comments: My initial reaction to the Hobby Lobby issue was to commit to never stepping foot in any of their stores. Beyond that, my reaction was pretty typical of those to the left of center in American politics. But I’ve not become truly engaged in this issue as I already have a lot on my plate to think about.

Then along came this article from Forbes, not normally a bastion of liberal thinking. And after reading it, I’m still not sure where it fits. What does fit is the idea expressed below that says “…ultimately the employer would still pay because the cost would be buried in higher premiums.”

That is what we’ve been doing for the past 50 plus years (my working lifetime). Namely causing citizens with coverage to pay for the health care of those without coverage. Whether you call it ‘taxpayers” money or ‘everyday citizens’ money, it comes from the same pockets. At the end of the day, the Supreme Court has simply redefined the language so that the rest of us carry the burden.

Avik Roy, Forbes Staff 7/01/2014

For all of the non-stop wall-to-wall coverage of yesterday’s Supreme Court decision in Burwell v. Hobby Lobby—in which the Court ruled that the government doesn’t have the authority to force “closely-held corporations” to violate their religious beliefs—a simple fact has been lost. The ruling did not overturn a single word of the “Affordable Care Act,” otherwise known as Obamacare. Nor did the Supreme Court prevent the government from requiring that taxpayers finance abortion-related services.

Pro-life activists—and Obamacare opponents—are cheering today. But when they sit down and reflect, they’ll realize that they haven’t won a thing.

The Supremes endorsed the White House’s ‘accommodation’ of Catholic institutions
On page five of the Supreme Court opinion, Samuel Alito spells out how the Obama administration can get around the Court’s ruling that the administration can’t force Hobby Lobby to offer health insurance plans with contraception and abortifacient coverage. “The government could, e.g., assume the cost of providing the four contraceptives to women unable to obtain coverage due to their employers’ religious objections,” writes Alito.

Ah, but who finances the government? Taxpayers. In other words, while the government can’t compel Hobby Lobby to finance abortifacients, it can compel taxpayers to do so. Isn’t that a distinction without a difference?

Alito continues:
Or [the White House] could extend the accommodation that HHS has already established for religious nonprofit organizations to non-profit employers with religious objections to the contraceptive mandate. That accommodation does not impinge on the plaintiffs’ religious beliefs that providing insurance coverage for the contraceptives at issue here violates their religion and it still serves HHS’s stated interests.

Alito refers to the “accommodation” issued by the White House originally in 2012, and revised in 2013—whereby taxpayers could pick up the tab for contraceptive coverage, instead of religious employers—as a great solution to the First Amendment issues in question. But when the White House issued that “accommodation,” social conservatives were far from pleased.

But last year, social conservatives called the accommodation ‘phony’. In a 2013 blog post for National Review, my colleague Grace-Marie Turner explained why the accommodation was “no different than the [contraception mandate] issued last year,” because the contraceptive services at issue would still get taxpayer funding. “This is simply money laundering,” she wrote at the time. On Monday, Grace-Marie wrote another piece describing the accommodation as a “shell game to shift funding for the mandated provisions to insurance companies. But ultimately the employer would still pay because the cost would be buried in higher premiums.”

Grace-Marie wasn’t the only one calling out the so-called “accommodation.” Ed Whelan, another National Review contributor, called it “phony.” Cardinal Timothy Dolan, president of the U.S. Conference of Catholic Bishops, in 2013 issued a statement highlighting the fact that the accommodation might protect explicitly religious institutions, but still would infringe upon “the freedom of the Church as a whole—not just for the full range of its institutional forms, but also for the faithful in their daily lives.” (Emphasis added.)

The ruling doesn’t at all affect the operation of Obamacare. Let’s be clear about one thing. In the Hobby Lobby decision, the Supreme Court overturned a single regulation issued by the U.S. Department of Health and Human Services. It didn’t overturn a single provision of the Congressional statute enacted in 2010 called the Affordable Care Act.

You wouldn’t have that impression based on the media coverage of this case. You’d think instead that by overturning HHS’s contraception mandate, the Supreme Court had overturned a huge chunk of the new health law. Nope.

Will this even give HHS a second of pause as it rolls out more and more Obamacare-related regulations? Hardly.

Think about it this way. HHS is throwing hundreds of regulations up against a wall. Only one of them has been overturned by the Supreme Court.

Source: http://www.forbes.com/sites/theapothecary/2014/07/01/the-supreme-courts-hobby-lobby-decision-didnt-overturn-a-single-word-of-obamacare/?partner=yahootix

Short Selling Drops to Lowest Level Since Lehman

roulette wheelMy Comments: Last Tuesday, I referenced an article with a compelling reason to think the current stock market move upward would soon go the other way. The author asserted the collapse was already under way. Here is an equally compelling article that suggests it’s not going to collapse, instead is going to continue going up.  (at least for a while!)

All this is to tell you no one has a clue. After the fact, everyone on the right side of history can claim they were right. But that’s like a broken watch which is right twice every 24 hours.

In my opinion, as a fincial advisor, the solution is to employ the skills of talented money managers, people with a laser like focus on one particular component of the overall market. Then make sure they have the ability to be in the market positively or negatively, or in cash. That way you really don’t care what happens, since your chances of increasing the size of your account are higher regardless of the history.

By Miles Johnson, Hedge Fund Correspondent / July 8, 2014
Hedge funds still unwilling to bet against the rally

Hedge funds have sharply scaled back their bearish bets that the value of stocks is about to fall, with the proportion of shares earmarked for short selling at its lowest level since before the financial crisis despite warnings of renewed market exuberance.

The percentage of stocks that have been borrowed by short sellers – who try to profit from a company’s share price falling – has dropped to the lowest level in the US, UK and the rest of Europe since the years before the collapse of Lehman Brothers, according to data compiled for the Financial Times by Markit.

The fall in short selling comes as Wall Street and markets in Europe trade at near record and multiyear highs, indicating that while some high profile hedge fund managers have warned of excessive market euphoria the industry is still unwilling to bet against the rally.

The amount of so-called short interest in the benchmark US S&P 500 index is hovering around 2 per cent of total shares in the index, close to the lowest level since Markit began collecting the data in 2006. In the European Stoxx 600 index, the level is similar at just over 2 per cent, while short interest in the UK FTSE All-Share index stands at less than 1 per cent.

This compares with sharply elevated levels in the years preceding the credit crisis, with the data showing short interest in the US in 2007 hitting a high of 5.5 per cent. The Markit data does not take into account all changes in stock indices over the period.

Buoyed in part by injections of cheap money from central banks, including the Federal Reserve’s asset-purchase programme, leading stock markets have continued to rise this year after enjoying strong gains in 2013, forcing some hedge funds to cut their short bets to avoid being squeezed.

As the FTSE All-World and S&P 500 have set records, volatility has faded away, with one measure, the Vix index or “Wall Street fear gauge” dropping to a near seven-year low.

“Historically, periods of low volatility usually lead to further periods of volatility, they are not precursors to a crisis.” – Antonin Jullier, global head of equity trading strategy, Citi

This has prompted a string of recent warnings from a number of leading hedge fund managers such as Baupost’s Seth Klarman, CQS’s Michael Hintze and David Einhorn of Greenlight Capital about the distortions being caused by ultra-low interest rates and bubbles in some asset classes.

Closely-followed short sellers such as Mr Einhorn have argued that US technology shares have reached “bubble” valuations, but have bemoaned the difficulty of making bets against them given the level of hype surrounding the sector.

“It is dangerous to short stocks that have disconnected from traditional valuation methods,” Mr Einhorn told his clients earlier this year. “After all, twice a silly price is not twice as silly; it’s still just silly”.

However, despite a jittery period for some technology stocks in the first half, investors have been undeterred by the warnings, with some analysts arguing that shares are still cheap compared with other assets.

“Historically, periods of low volatility usually lead to further periods of volatility, they are not precursors to a crisis,” said Antonin Jullier, global head of equity trading strategy at Citi.

Mr Jullier said that some hedge funds had become discouraged from short selling as a result of being repeatedly wrongfooted by rising markets.

“Hedge funds have underperformed in the first half and this means their appetite for risk has fallen over the year,” he said.

Rising stock markets have coincided with sharp price increases for other asset classes, ranging from Jeff Koons’s sculptures to junk bonds and London house prices, prompting concerns among some investors that markets have lapsed back into complacency.

Powered by the U.S., Global Assets Forecast to Hit $100 Trillion

My Comments: So, just how much is $100 Trillion?

Can you say “A lot!”?  What’s equally mind boggling to me is that in 1967 ( or maybe it was 1966?) I built a house for myself and my wife. In those days I acted as my own general contractor. Back then, I could also dig my own footers. The plans were drawn by an architect friend who charged me something but I have no idea what.

My point is the house cost less than $10 per square foot to build. And today is stands proudly in a quiet Gainesville neighborhood, though it could use a coat of paint. At the time, though the total was less than $17,000, it was a lot of money. Back then, to have been told that in 2014 it would cost at least $250,000 to build a house of similar size would have been equally mind boggling.

So while $100 Trillion is a lot of money, it’s all relative. It’s what you do with the money that counts, not how much there is. And if you can’t use it to spend on stuff you need and want, it has very little value.

By Nick Thornton / July 1, 2014

Worldwide assets under management are poised to hit $100 trillion by 2018, so long as U.S. markets continue to lead the way, according to Cerulli’s latest research.

The U.S. accounts for just under half of global assets under management.

Low interest rates around the globe have pushed cash into equity, boosting financial markets.

Cerulli’s five-year prognosis is optimistic, though the report predicts that managing assets going forward will be trickier than in the past several years.

“The dark days of late 2008 and early 2009 may be well behind us, but there continues to be pressure on net revenues,” said Shiv Taneja, a London-based managing director at Cerulli.

The firm’s annual report, now in its 13th year, is a massive analysis on markets around the world, from emerging markets to the developed economies of Europe, Asia and North America.

“For all the bashing the global emerging markets have taken over the past couple of years, Cerulli’s view is that it will be markets such as Southeast Asia and a handful of others that will top the leader board of mutual fund growth over the next five years,” said Ken F. Yap, Cerulli’s Singapore-based director of quantitative research.

3 Reasons The Current Equities Market Is Exhausted

profit-loss-riskMy Comments: Many of my clients are asking how come their investments are not as exciting as what they hear on TV these days. And my standard answer is that exciting comes in two flavors, great and frightening.

For the most part, I’m trying to help them avoid the frightening part. For many years I followed what we now call a strategic approach to investments. This is when you pick out good stuff to be invested in and then simply leave it alone. If the markets move up, you get to participate, but when they go down, you also get to participate.

The alternative is a tactical approach. This is where you accept the fact that you will only capture some of the upside, but you also capture less of the downside. In fact some programs I have not only avoid capturing the downside, but actually make money when all around are losing money.

The dilemma is that the noise from TV and the media and magazines helps you forget and overlook the panic that always happens from time to time. Which is why it’s hard to make sense of falling behind your friends when they tell you excitedly their investment in X was up 25% last year.

For every article that tells you the world as you know it is about to end, there are articles that tell you it’s not. Here are 3 reasons to be cautious over the next several months. If you want to see the charts, you’re going to have to go to the source, which is HERE.

May. 29, 2014 3:44 PM ET

With the S&P 500 hovering near record highs, is the market over-bought? Here are three reasons to be cautious when making new equity purchases.

Shiller CAPE 10 Ratio:
The current CAPE 10 ratio at 25.7 is significantly higher than its mean value of 16.5. When the ratio value moves above 20 it is time to become wary of the equity market. Even a value over 25 is not conclusive evidence the market will not move higher as investors in the late 1990s will remember. However, the probability of significant upward market movement diminishes as the CAPE 10 ratio continues to rise.

Bullish Percent Indicators: A second warning signal comes from Point and Figure graphs for hundreds of stocks that make up the important U.S. market indexes. The following table shows the Bullish Percent Index (BPI) percentages for seven major U.S. Equities markets. Markets that reflect large-cap stocks are all priced in the over-valued range or 70% and above. Those indexes are: S&P 100, S&P 500, DJIA, and DJTA. The New York Stock Exchange (NYSE) dipped below the 70% zone last April. Smaller-cap stocks are not showing the same strength as large-cap stocks, another signal the current equities market is beginning to falter.

Going back to 2013, it is apparent that these major markets can remain in the overbought zone for many months. The question is, how long can the bull market continue without a 10% to 15% correction?

Cluster Weighting Momentum Analysis: The third reason the current stock market appears to be tired is not as straight forward as the first two indicators. Cluster Weighting Momentum (CWM) requires digging deeper into the weeds of security analysis. The first move requires developing a list of ETFs that cover all major U.S. Equity asset classes, an array of bond and treasury ETFs, developed international markets, emerging markets, domestic and international REITS, international bonds, precious metals, and commodities. In other words, the global market is included in the list of ETFs [one stock, Berkshire Hathaway (BRK.B) is included] selected to make this point.

Once the ETFs are selected, we run what is known as a Cluster Weighting Momentum analysis to see which areas of the global economy are performing best. After ranking the ETFs using three metrics, we then “cluster” the ETFs based on a correlation cutoff. A correlation cutoff of 0.5 was used in this example. We are attempting to find the best performing ETFs that have low correlations.

This list of ETFs are ranked based on the most recent three-months’ performance, six-months’ performance, and volatility. Percentages are assigned to each variable and a semi-variance calculation is used to determine volatility. The rankings are shown in the following table.

Check where the U.S. Equities ETFs show up on the list and you will observe they are not high on the list, particularly mid- and small-cap growth, VOT and VBK respectively. ETFs that rank high are bonds, dividend generators, REITs, Treasury, and emerging markets.

Correlation Results: ETFs from the above table are next run through a correlation analysis using 0.5 as the correlation cutoff. The cluster diagram is too large to be shown in this article, but the results are presented in the following table.

The top performing ETFs with correlations below 0.50 are: VNQ, DBC, RWX, BWX, PCY, TLT, BRK.B (Yahoo codes it BRK-B), DBA, IDV, and UNG. Not one of the “Big Seven” U.S. Equities ETFs made the list and they are: VTI, VTV, VOE, VBR, VUG, VOT, and VBK. Instead, we see three commodities (DBC, DBA, UNG), REITs (VNQ and RWX), and bonds-treasuries (BWX and TLT). BRK.B is the closest we come to the U.S. Equities market.

Will the broad U.S. Equities market move higher? That is an unknown, but the three signals listed above place a low probability we will see significant improvement over the next four to six months. It is time to be a cautious investor.

How the Wealthy Keep Themselves on Top

Breughel-The-Kermess My Comments: I’ve expressed my opinion, in earlier posts, that among the challenges facing my children and grandchildren will be the disparity in this country between what we call the “haves” and the “have nots.” If they allow this disparity to get too great, then they are dooming their children to eventual social chaos.

This social phenomena has manifested itself in the Middle East recently. Power and the lack of it, held by a few and wanted by many, is driving social chaos. In the west, this is going to be driven by economic forces first, since we have a reasonable, so far, mechanism for distributing power: frequent elections that are supported by almost all of us.

But human nature is going to step in and re-arrange the status quo unless we are aware of the possibility and maintain that awareness. How many of you here in Gainesville noted the recent articles in the Gainesville Sun about who gets paid most at the University of Florida and in Gainesville itself? Someone else is sensitive to this issue.

By Tim Harford

The more unequal a society, the greater the incentive for the rich to pull up the ladder behind them

When the world’s richest countries were booming, few people worried overmuch that the top 1 per cent were enjoying an ever-growing share of that prosperity. In the wake of a depression in the US, a fiscal chasm in the UK and an existential crisis in the eurozone – and the shaming of the world’s bankers – worrying about inequality is no longer the preserve of the far left.

There should be no doubt about the facts: the income share of the top 1 per cent has roughly doubled in the US since the early 1970s, and is now about 20 per cent. Much the same trend can be seen in Australia, Canada and the UK – although in each case the income share of the top 1 per cent is smaller. In France, Germany and Japan there seems to be no such trend. (The source is the World Top Incomes Database, summarised in the opening paper of a superb symposium in this summer’s Journal of Economic Perspectives.)

But should we care? There are two reasons we might: process and outcome. We might worry that the gains of the rich are ill-gotten: the result of the old-boy network, or fraud, or exploiting the largesse of the taxpayer. Or we might worry that the results are noxious: misery and envy, or ill-health, or dysfunctional democracy, or slow growth as the rich sit on their cash, or excessive debt and thus financial instability.

Following the crisis, it might be unfashionable to suggest that the rich actually earned their money. But knee-jerk banker-bashers should take a look at research by Steven Kaplan and Joshua Rauh, again in the JEP symposium.

They simply compare the fate of the top earners across different lines of business. Worried that chief executives are filling their boots thanks to the weak governance of publicly listed companies? So am I, but partners in law firms are also doing very nicely, as are the bosses of privately owned companies, as are the managers of hedge funds, as are top sports stars. Governance arrangements in each case are different.

Perhaps, then, some broad social norm has shifted, allowing higher pay across the board? If so, we would expect publicly scrutinised salaries to be catching up with those who have more privacy – for instance, managers of privately held corporations. The reverse is the case.

The uncomfortable truth is that market forces – that is, the result of freely agreed contracts – are probably behind much of the rise in inequality. Globalisation and technological change favour the highly skilled. In the middle of the income distribution, a strong pair of arms, a willingness to work hard and a bit of common sense used to provide a comfortable income. No longer. Meanwhile at the very top, winner-take-all markets are emerging, where the best or luckiest entrepreneurs, fund managers, authors or athletes hoover up most of the gains. The idea that the fat cats simply stole everyone else’s cream is emotionally powerful; it is not entirely convincing.

In a well-functioning market, people only earn high incomes if they create enough economic value to justify those incomes. But even if we could be convinced that this was true, we do not have to let the matter drop.

This is partly because the sums involved are immense. Between 1993 and 2011, in the US, average incomes grew a modest 13.1 per cent in total. But the average income of the poorest 99 per cent – that is everyone up to families making about $370,000 a year – grew just 5.8 per cent. That gap is a measure of just how much the top 1 per cent are making. The stakes are high.

I set out two reasons why we might care about inequality: an unfair process or a harmful outcome. But what really should concern us is that the two reasons are not actually distinct after all. The harmful outcome and the unfair process feed each other. The more unequal a society becomes, the greater the incentive for the rich to pull up the ladder behind them.

At the very top of the scale, plutocrats can shape the conversation by buying up newspapers and television channels or funding political campaigns. The merely prosperous scramble desperately to get their children into the right neighbourhood, nursery, school, university and internship – we know how big the gap has grown between winners and also-rans.

Miles Corak, another contributor to the JEP debate, is an expert on intergenerational income mobility, the question of whether rich parents have rich children. The painful truth is that in the most unequal developed nations – the UK and the US – the intergenerational transmission of income is stronger. In more equal societies such as Denmark, the tendency of privilege to breed privilege is much lower.

This is what sticks in the throat about the rise in inequality: the knowledge that the more unequal our societies become, the more we all become prisoners of that inequality. The well-off feel that they must strain to prevent their children from slipping down the income ladder. The poor see the best schools, colleges, even art clubs and ballet classes, disappearing behind a wall of fees or unaffordable housing.

The idea of a free, market-based society is that everyone can reach his or her potential. Somewhere, we lost our way.

Correction Seen as Welcome

investmentsMy Comments: You should first note the date when Jeff Benjamin posted these comments. For whatever reason, I saved them and decided this morning would be a good day to bring them to the table again.

What is happening to the DOW and the S&P500 and Russell 2000 is a good thing. In the short term, it makes people uneasy, especially since the debacle of 2008 is always in the back of our minds. However, what’s happening now is an opportunity to take advantage of the dip and then smile as it turns around and starts back up again, as it most assuredly will.

Pullback would likely trigger next big run-up in stocks

By Jeff Benjamin | Mar 24, 2013

By a variety of measures, the U.S. equity market is poised for some kind of a pullback, but that isn’t necessarily a bad thing — a fact that underscores the kind of momentum driving stocks these days.

“I don’t know what it will take to trigger a pullback, but as soon as we get a correction of 3% or 4%, it will be short-lived because that will be an opportunity for more investors to get in,” said Kevin Mahn, president and chief investment officer of Hennion & Walsh Asset Management Co.

Even as stocks showed signs of volatility last week, and with most major U.S. equity indexes at or near record highs on a nominal basis, analysts and professional investors such as Mr. Mahn insist that things are progressing in a normal pattern.

“Right now, investors are looking for any crack or any kind of reason to start taking some profits before the long-awaited pullback,” Mr. Mahn said. “I think investors should reset their expectations in terms of how much more stocks can grow from here.”

In essence, at this point in the cycle a small correction is likely and maybe even necessary, but it isn’t a reason to panic.

“Medium to longer term, I’m pretty comfortable with the stock market, but in the short term we’re going to have some kind of pause,” said Chris Wallis, chief executive and chief investment officer of Vaughan Nelson Investment Management LP.

Although stocks could undergo a sudden correction, the market is already “trying to pause through some consolidation and choppiness that lets it correct with time rather than price,” he said.

In the absence of a major trigger to start a pullback, choppiness will have to do, Mr. Wallis said.

Early last week when the government of Cyprus threatened to tax savings deposits in an effort to help finance a bailout of the nation’s financial system, initial concerns were that such a move could spark a stock market reaction in the United States.


“We’re beginning to hear some whispers and questions of whether, when the Fed finally pulls away the punch bowl, the economy will be able to stand on its own,” Mr. Anderson said. “It’s been more than 500 days since we’ve had a correction of 10% or more, so to have any kind of pause at this point would not be unexpected.”

Paul Schatz, president of Heritage Capital LLC, also thinks that a “healthy correction” is in order, but he calculates as “even money” the chances of the stock market gaining or losing between 5% and 8%.

“I don’t think there are enough warning signs to warrant a full-fledged correction of 10% or more, but we certainly should be closer to one of those garden-variety healthy pullbacks,” he said. “We are getting to the point where emotion and a manic state takes hold, and the higher you push from here without a pullback, the more dangerous and ugly will be the ultimate downside.”

How the Mortgage Interest Deduction Could Change

real estateMy Comments: As someone who has a home mortgage, I’ve long enjoyed the abilty to write off the interest I pay against my taxable income. If these folks are right, I’ll be eligible for a tax credit instead of an expense item and I may very well enjoy a higher benefit.

But if you think the real estate industry is going to roll over and play dead, think again. I’m inclined to think their argumet in favor of no change is a spurious one, but I’m a lonely voice. It’s similar to the arguments in favor of a flat tax; the number of accountants and tax folks who depend on a complicated tax code to sustain their standard of living is huge. They are not going to roll over and play dead either.

By Mark Koba | CNBC – Tue, Jul 9, 2013

Congressional action on the U.S. tax code could dramatically alter one of its sacred cows: the mortgage interest deduction. And the change could come in 2013.

House Ways and Means Committee Chairman Dave Camp (R-Mich) held tax reform hearings in April to eliminate loopholes. He said he’s “carefully looking into revising” the popular provision that many in the real estate business consider crucial to the industry.

Camp said he’d like a total tax reform package before the year is out.

One analyst says the time is ripe to change the deduction-in existence since 1913- which is costing the U.S. government billions in tax revenue while doing little to help home ownership.

“It costs at least $70 billion a year in lost tax revenues,” said Will Fischer, a senior policy analyst at the Center on Budget and Policy Priorities, and co-author of a study released last month that called for changing the mortgage interest deduction intto a tax credit.

“It only benefits about half of homeowners that pay interest,” Fischer said. “I think there’s real interest in reforming the mortgage interest deduction to help more people, while bringing in more tax revenue.”

Right now, taxpayers who itemize their deductions can deduct up to $1 million of the interest paid on their mortgages, plus up to $100,000 of the interest on home equity loans, a type of loan in which borrowers use the equity in their home as collateral. Homeowners can do the same on a second home.

In his paper, Fisher states that in 2012, 77 percent of the benefits from the mortgage interest deduction went to homeowners with incomes above $100,000. Close to half of homeowners with mortgages-mostly lower and middle-income families-received no benefit from the deduction, according to Fisher.

Only about 30 percent of eligible taxpayers actually use the mortgage interest deduction each year.

“You can make the case for the deduction, but it really does promote home ownership for mostly upper income levels,” said Mark Goldman, a real estate professor at San Diego State University.

“And I’ve never had a deal happen or not happen because of the deduction,” added Goldman, who is also a real estate broker.

Fischer’s study points to several bipartisan panels that have looked into changing the deduction into a tax credit.

They include the Simpson-Bowles fiscal commission, as well as a tax reform group during the first term of president George W. Bush, and a debt reduction commission headed by former Democratic White House official Alice Rivlin and former New Mexico Republican Senator Pete Domenici.

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Egypt: Persistent Issues Undermine Stability

EgyptMy Comments: This article comes from Stratfor, a reliable source of information about global politics and economics. The conclusion is not a good one. And if you happen to wonder why a financial planner is Florida gives a tinker’s damn about what is happening in Egypt, it’s because it will influence how life plays out over the next few decades for my children and grandchildren. And yours too!

The facts on the ground in Egypt are dominating the news and with good reason. And there’s very little we can do about it.

But an understanding of what is happening and why will go a long way to help you make better investment decisions over the next several years. The dynamics of what is happening in Egypt make it clear that while such a crisis will not happen in the US, demographics and financial opportunities for our children and grandchildren will greatly influence the lives they live in coming years.

Egypt’s crisis goes much deeper than the recent political chaos. With the leader of the Supreme Constitutional Court taking over the presidency at the behest of the military, the new government will likely represent a coalition of interests facing many of the same challenges that brought about Mohammed Morsi’s downfall. Egypt’s population has grown well beyond the means of the state to support its needs, and even a strong state will struggle to ensure sufficient supplies of basic staples, particularly fuel and wheat.

Underlying the question of what political structure will emerge from this week’s crisis, the fundamental fact is that Egypt is running out of money. Dwindling foreign reserves point to a negative balance of payments that is sapping central bank resources. At the same time, Egypt’s reliance on foreign supplies of fuel and wheat is only growing. Egyptian petroleum production peaked in 1996 and the country first became a net importer in 2007. Government fuel subsidies are an enormous burden on state finances and, throughout the past year, failures to pay suppliers and a shortage of foreign exchange available to importers have caused supply shortfalls and price spikes throughout the country.

The government has a few options, including backing off subsidies in hopes that higher prices will help reduce consumption and therefore cut down on the net drain on state finances. That route carries a high risk of a major political backlash, so it is more likely that the government will continue, if not increase, its commitment to using state funds to guarantee sufficient supply and low prices.
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Happy 4th of July !

flag USThis expression is unique to America. With it we celebrate the declaration of independence from Great Britain with fireworks and such.

As someone born in Great Britain, but now a certified citizen of these United States, the 4th of July is an established part of psyche.

But memories of my childhood include the celebration of Guy Fawkes Day. This event celebrates the day that Guy Fawkes, in 1605, attempted to blow up the Houses of Parliament. The objective was to rid the country of the King and establish instead a Catholic monarchy in England.

To this day, some in Britain celebrate Guy Fawkes Day, and the survival of the King, with bonfires and fireworks.

I’ll be back on Monday, July 8th. Have a great weekend!