Do you remember the stock market of the late 1990s? At the time, stock indexes were rocketing higher, setting records. I remember all the buzz after the S&P 500 returned more than 20% for the third calendar year in a row. It was unprecedented. It was so unprecedented and so unlikely that many analysts were forecasting a down market or at least lower returns for that third year simply because three solid years in a row didn’t seem possible. At the time I pointed out that only a few large stocks were pushing the indexes higher. Because of the way the indexes are computed, the behavior of the largest companies dictates the returns of major indexes such as the S&P 500. Most stocks were flat or declined in value while the tech stock mania pushed Microsoft, Oracle, and a few others steadily higher.
Well, the same thing seems to be going on in the latest rally, and it’s due to one stock not the largest 10 or 20. Apple is dominating and overshadowing all the other stocks. Apple is doing so well that its earnings, profits margins, and other factors as well as its stock price growth are distorting the averages and making the entire market look better than it is.
Brain function, including short-term memory, reasoning, and vocabulary, deteriorates during middle age, starting perhaps as early as 45. The Wall Street Journal lists some exercises from the book, Max Your Memory by Pascale Michelon that are designed to prevent and delay the decline of brain function. (Subscription might be required for access.) The book has dozens more exercises. Here’s a sample:
MAKE CONNECTIONS
With the link system, you use your imagination to create associations between objects (again, the more unexpected, the better). Say you want to remember to buy cheese, candles and paper napkins for a friend’s party—spend a few seconds thinking of that friend with a paper napkin tucked into her shirt and blowing out 100 candles on a giant Gouda cheese. Here, take two minutes to link all four items. Cover up the items and recite the multiplication table for four up to 64. Then try to recall the four words. Try again after 30 minutes and one hour.
Larger businesses have been doing well since the economy’s bottom in 2009 and have been hiring at a reasonable clip. But employment overall still is weak, and small businesses seem to be the reason. They aren’t hiring, and surveys by the NFIB indicate they don’t plan to hire anytime soon. It’s been assumed that this is partly an effect of the financial crisis and partly because small businesses are more dependent on housing.
But what if there’s another reason? What if small businesses aren’t hiring because their money is paying for higher employee medical care expenses for employees? That’s the argument here. Scott Shane of Case Western Reserve University says he’s looked at the data and that hiring by new businesses has been declining since 1999. He pins the cause on the cost of providing medical coverage to employees.
The slide in job creation appears linked to the rising cost of employee benefits. As the cost of providing for employees’ health care and retirement increases, hiring people becomes more expensive. The cost of employee benefits has been rising faster than businesses’ revenues since at least 2000. The BLS reports that from 2001 to 2010 the cost of employee benefits at private businesses rose faster than inflation, going up 13.6 percent in inflation-adjusted terms. The increase in benefit costs over the past decade suggests that benefit costs are eating into companies’ profits.
EQUIPMENT OVER LABOR
It is only natural that entrepreneurs try to reduce those costs. One way to do that is to hire fewer people. Equipment doesn’t need health insurance or retirement plans. So if a business can produce the same results by substituting investment in equipment for investment in labor, it can solve the rising benefit cost problem, albeit at the expense of employment. Therefore it’s not surprising that a smaller fraction of entrepreneurs hires employees, and those who do hire fewer people than they once did. The profit motive demands it.
He says the solution is to contain medical expenses. But the health care overhaul enacted in 2010 doesn’t do that, and some studies say it increases costs.
In their futile, misguided efforts to control medical costs, the government and insurers are driving many doctors out of business. Lower reimbursements for services couples with rising liability insurance payments and other expenses and tougher regulations make it tough to run a medical practice profitably. Here’s why many doctors are closing their practices.
The European sovereign debt crisis dominated the headlines and market actions for longer than a year. It’s been going on so long and had so many twist and turns that people are getting confused. The Wall Street Journal did some very good background research and summarized the key points in a series of articles and some special web features. You might need a subscription to access some or all of the items, but I thought it would be worthwhile to provide links to the key articles for those who are interested in the background and have access to the WSJ.
This article explains how dithering by European leaders allowed the crisis to spiral out of control. It has a lot of behind-the-scenes information, especially about conflicts between leaders of Germany and France, who have very different views of the actions that should be taken.
This article has behind-the-scenes action featuring the leaders of Germany and Italy in particular and some other color as well.
Messrs. Trichet and Draghi phoned to press Mr. Berlusconi to honor his promises. European Union President Herman Van Rompuy also called and asked him to take the crisis more seriously. “Otherwise,” Mr. Van Rompuy told him, “we are all in trouble.”
On Aug. 31, Italian media reported that Mr. Berlusconi had told his advisers he was giving up on pension reform, a key ECB demand.
Investors resumed their flight from Italy. The ECB let Italian bond yields rise again. The episode appeared to confirm the fears of the German faction at the ECB: Politicians would revert to bad behavior if given a reprieve from market pressures.
The crisis had reached a scale that menaced the global economy. The ECB wasn’t going to save Italy. Europe’s other governments didn’t know where else to turn.
People adopted a number of bad investment practices in the 1990s, and they continue to follow them. One simple strategy that will boost returns is to rebalance a portfolio periodically. Sell what’s done well and buy more of what’s declined until your portfolio is back to your planned allocation. That’s a way to sell high and buy low. But few people take event his simple step, according to a new study. The academic world says this is due to a behavior they call “anchoring.” Whatever you want to call it, it’s not good financial management.
In fact, many people don’t even adjust their portfolios on an annual basis, says Victor Ricciardi, a professor of finance at Goucher College in Baltimore, Md., despite the fact that an increasing number of companies allow investors to automatically set up an annual rebalancing online.
Ricciardi—who has done extensive research in the fields of behavioral finance and the psychology of risk—attributes this lack of proactive investment behavior to what he calls “the anchoring effect.” The anchoring effect causes individuals to cling to a belief that may or may not be true, and to base their decisions for the future on that belief. The inertia and inattention that this leads to can have detrimental effects on their retirement accounts.
“In the late 1990s, for example, the stock market was going up and people simply followed suit and kept buying more and more shares,” Ricciardi says. “Even though that resulted in a bubble situation, investors’ general tendency was to just let things be without bothering to take any timely decisions with respect to asset allocation and risk—decisions that could have helped them fare better in the future, when the markets turned.”
There’s some good research from The Wall Street Journal here (subscription might be required) on what happened behind the scenes to MF Global before it filed for bankruptcy last fall. The main point of the story is that MFG didn’t buy the European sovereign debt as part of a wild gamble. The move was taken largely under pressure from regulators. They wanted the firm to increase its income and cash flow. MFG decided the best way it could do that in a short time was to buy the higher-yielding European government debt and hope that there wasn’t a default or credit crisis. Apparently none of the bonds defaulted. Instead, creditors and regulators demanded more collateral or wouldn’t roll over maturing MFG debt. It’s good reading and is an example of how regulators can make matters worse.
I’m planning to take a break until the New Year. I hope each of you has a good ending to 2011 and a happy 2012. I’ll be back soon.
Inequality of incomes in the U.S. is a major topic today, partly because of Occupy Wall Street and its offshoots. But measuring income distribution is a tough job, and many people don’t do it right. For example, when income tax returns are used, they don’t include many tax-free benefits (such as employer-paid medical insurance) and government transfer payments (food stamps, rent subsidies, etc.) Alan Reynolds of the Cato Institute has done a lot of work in this area and pulled apart the numbers to reveal more detail than the typical news media report does. You can read the highlights of his latest research here. His major point in this piece is that changes in the tax code change behavior. Lower tax rates, especially capital gains tax rates, since the 1970s mean people are more likely to sell assets and recognize capital gains.
In short, what the Congressional Budget Office presents as increased inequality from 2003 to 2007 was actually evidence that the top 1% of earners report more taxable income when tax rates are reduced on dividends, capital gains and businesses filing under the individual tax code.
If Congress raises top individual tax rates much above the corporate rate, many billions in business income would rapidly vanish from the individual tax returns the CBO uses to measure the income of the top 1%. Small businesses and professionals would revert to reporting most income on corporate tax returns as they did in 1979.
If Congress raises top tax rates on capital gains and dividends, the highest income earners would report less income from capital gains and dividends and hold more tax-exempt bonds. Such tax policies would reduce the share of reported income of the top earners almost as effectively as the recession the policies would likely provoke. The top 1% would then pay a much smaller portion of federal income taxes, just as they did in 1979. And the other 99% would pay more. As the CBO found, “the federal income tax was notably more progressive in 2007 than in 1979.”
The U.S. probably will experience economic growth in the fourth quarter of 2011 and subsequent quarters in 2012. That’s the forecast from Van Hoisington and Lacy Hunt of Hoisington investment Management. The bond managers, who have favored long-term treasury bonds for several years, believe that declining productivity, elevator inventory investment, and contracting real wage income will combine to reduce domestic economic growth. The duo also continue to criticize Federal Reserve policy and say that it is making economic problems worse.
The initial market reaction to the announcement of the Fed’s latest policy move, known as the Maturity Extension Program (MEP) or Operation Twist, was for commodities and stocks to fall, the dollar to strengthen, and bond yields to decline. Thus, the reaction was to reinforce trends already in place. These market reactions were the exact opposite of what occurred during QE2. Lower commodity prices and the firmer dollar will diminish inflation, thus serving to reverse the drop in real wages that millions of households suffered during QE2. This benefit will not be apparent immediately because the economy has to work through the negative consequences of falling real income and dropping productivity that occurred under QE2. Unfortunately, it is unclear whether Operation Twist will ultimately accrue any benefit to the economy because efforts to achieve very low interest rates could produce counterproductive or unintended consequences.
sending...