Archives for June 2009

The US Budget is on an Unsustainable Path

Last week the Congressional Budget Office (CBO) released the Long-Term Budget Outlook. The CBO is a nonpartisan federal agency that provides economic data to Congress. The outlook is very alarming! The conclusion is that under current law, the federal budget is on an unsustainable path. The problem? Federal debt will continue to grow much faster than the economy over the long run.

The chart above illustrates the projected public debt as a percentage of gross domestic product. In the chart you see two projected paths. The path which shows a steep increase in debt is the forecast under current law. The other projection is the forecasted path based on suggested changes to the current law.

At the end of 2008, federal debt held by the public was 41% of GDP. In just two years the CBO is projecting a debt load of 60% of GDP! What’s really disturbing is that CBO is showing a debt expansion from 41% of GDP to more than 180% of GDP in just 25 years. This would be an unprecedented surge in debt that would have a very negative impact on our economy.

Rising health care costs and an aging US population are two reasons cited for increased spending. Add in the government’s major health care programs, Medicare and Medicaid, which are also growing faster than the economy. Don’t forget social security and the projected shortfalls we face with that program in the future. Factor in the current recession and the government’s “stimulus” spending and you’ll see that it’s unlikely our government will be able to correct this problem soon without some serious changes to the current law.

So what does this mean? For one, it means we will almost certainly be facing higher taxes in the future. The fastest way to keep deficits from accumulating debt to levels that would seriously harm our economy is to increase revenues (taxes!) or cut spending sharply.

I am hopeful that our elected leaders will find a solution to this problem (other than higher taxes) and have the courage to take bold action soon! This is a path that we can’t afford to go down. We must see some changes—the right changes—to our current policies and programs to avoid a disaster.



Weekend Reading

Here are some things I read this week that I thought might interest our readers:

Markets, Economy & Investing

  • The inflation vs. deflation debate (
  • Inflation rates for 77 countries (Bespoke Inestment Group)
  • The 10 Hottest Commodities of 2009 –and the ETFs that track them (TraderMark)
  • Stock buybacks by S&P 500 companies have plummeted (Barron’s)
  • Warren Buffett Getting No Respect (Bespoke)
  • Country stock market performance for 83 countries since the recent top (June 2nd) [Bespoke]
  • How Bernie did it – an investigation uncovers the secrets of Bernie Madoff’s massive fraud [Fortune]
  • “Consumer spending increased in May, the fourth gain in the last five months. “Real” (inflation-adjusted) consumer spending also increased in May and was revised upward for both March and April. These figures support our view that the recession is over.” [First Trust]
  • A chart showing the equity in household real estate [The Big Picture]


Facts, Stats, & Quotes:

  • “338% is how much shares of Smith & Wesson, based in Springfield, Mass., have increased since a low of $1.53 in October 2008.  That’s in part because of a 62% increase in sales of handguns and rifles for civilian use.” [Fortune Magazine, May 11, 2009, p12]

Have a great weekend!


Eat, Drink, and Be Merry

So goes the wise words of King Solomon in the Book of Ecclesiastes of the Old Testament. In fact, that phrase appears 5 times in the Book. But it doesn’t occur near as often as the phrase, “nothing new under the sun.” This phrase is implied or used over a dozen times.

This reminds me of a conversation I had recently with a client. He and I sat across from each other at a local diner and he opined various thoughts of excess greed that has/is pervading the market. He went into how unprecedented it all is, and how he just wasn’t sure if he wanted to give some of these CEO’s his money to invest by owning shares of their stock. (Case in point: Frontline: Breaking the Bank.)

My reply? There’s nothing new under the sun. I believe there are 3 main reasons why this person was overly-anxious about the present problems.

  1. Media – Today, we have dedicated cable channels that devote their entire 24 hour broadcast to the financial markets. They are enlarging the problem by simply reporting it. And, of course, bad news sells ads. If all there was was good news, you probably wouldn’t watch. We humans thrive on worst case scenarios. Can you imagine the weather channel reporting, “It’s beautiful out, all sunny, have a great day!” No way, they are always spinning tiny clouds into possible tornadoes and tropical storms at some point always turn into Category 5 hurricanes, although few hit that way.
  2. Internet – The internet has allowed us to become so much more globalized than ever before. Now we know what the Asian markets did before our heads lift off our pillows. The bad news pouring out of undeveloped economies has made a bad thing worse.
  3. Law of Compounding – When you have more people, you’re bound to have more corruption. In 1980, the world population was 4.4 Billion. In 2008, we had 6.7 Billion. That’s 2.3 Billion more people around to either do good, or do evil. Say only 1% of those chose to do evil, well that means 23 Million of them are doing bad things. (The population of Ohio is 11.4 million.) Excess greed, which was bothering my client, is only 1 of many bad things they are up to.

My point? These 3 items I feel have magnified a problem that has existed even in the days of King Solomon. Greed is not a new concept, it is what ultimately destroyed the Roman Empire. So if the doom and gloom of present day happenings are keeping you up at night, spiking your blood pressure, and causing you not to invest in quality businesses at historic values, I simply say…chill, there’s nothing new under the sun.



Credit Card Massacre: Your First Step?

Many Americans are drowning in debt.

Credit card debt is a problem for many Americans.  According to the American Bankers’ Association the average family today carries $8,000 of credit card debt.

If this describes you, then what’s the solution?  There is no easy fix.  The answer is to change your direction.  The answer is to change the behavior and choices that led you to where you are.  The best time to start is today.  Take a step towards a new destination.

Is a credit card massacre your first step on a path towards financial freedom?


My Top 10 Free Websites For Investors

My Personal Favorite

  1. – FINVIZ is my favorite free resource for investors.  My favorite feature on FINVIZ is the ‘news’ section.  FINVIZ pulls news from the top financial websites and blogs including many on this list.  You can filter the news by time or by source.  The site also offers market visuals, a robust screener, and a portfolio tracker.

Quotes, Portfolio Tracking & Research

  1. Google Finance – Features a portfolio tracker that I use to monitor news on the stocks in my portfolio.
  2. Yahoo! Finance – A great site for stock quotes and research.
  3. Morningstar – An excellent resource for mutual fund investors.


  1. – Free news and information from the source that many professional investors use every day.
  2. MarketWatch – Part of The Wall Street Journal Digital Network offering a ‘News Viewer” that allows you to filter the news by type and category.


  1. – An amazing tool for creating your own stock charts.  If you’re not familiar with stock charts visit ‘ChartSchool’, a section of the site with excellent articles and information on stock charting and technical indicators.


  1. Abnormal Returns – This is my favorite blog because it features a daily list of links which is like having a filter with the best of the investment blogosphere.
  2. The Big Picture – A blog written by Barry Ritholtz that features several posts a day on the economy and capital markets.
  3. MarketBeat – A blog from the Wall Street Journal.

What are your favorite free investment related websites?  Leave your favorites in the comments for this post.


The Long-Term Trend Is Changing

A simple way to identify the long-term trend of a market index or stock is to compare its price to its 200-day moving average.

The S&P 500 and the Dow are now trading above their 200-day moving averages. This is a positive sign for the stock market.

However, the direction of the moving average line itself is also important. A rise in the “slope” of this trendline would confirm that the long-term trend of the market has indeed changed. Stay tuned.

As these charts illustrate the 200-day moving average is a pretty good indicator of the market’s trend. When the price is below the 200 day line, the market trend is bearish. When the price is above the trendline, the market is bullish.


Cisco, Travelers into the Dow

A copy of today’s press release:

NEW YORK (Jun. 1, 2009) ― Two stocks in the Dow Jones Industrial Average will be replaced, Dow Jones & Company announced.

The Travelers Companies, Inc. (TRV) is taking the place of Citigroup, Inc. (C) and Cisco Systems, Inc. (CSCO) is going in for General Motors Corp. (GM). Both changes are effective with the opening of trading on June 8, 2009.

"The parlous state of GM has left us with no choice but to remove it from The Dow. A bankruptcy filing immediately disqualifies a stock regardless of a company’s history or its role as a cultural icon," said Robert Thomson, managing editor of The Wall Street Journal and editor-in-chief for all of Dow Jones. "We were reluctant to remove Citigroup at the height of the financial frenzy, but it is clear that the bank is in the midst of a substantial restructuring which will see the government with a large and ongoing stake. We genuinely hope that once the bank has refashioned itself that we will again be able to consider it for inclusion – Citigroup is a renowned institution, not only in this country, but around the world."

The Journal’s Managing Editor oversees the makeup of "The Dow," which Charles H. Dow created as a 12-stock index in May 1896 and today is the best-known stock market barometer in the world.

"The selection of Travelers, a property and casualty insurance company, is intended to restore the financials industry to full representation in The Dow," Mr. Thomson said. "When we removed American International Group, Inc. last fall, we substituted Kraft Foods, Inc. rather than another financial stock because the financials industry was then in great upheaval. That choice left financials underrepresented in The Dow, a deficiency we are now correcting."

Mr. Thomson said that Cisco is a fitting addition "because its communications and computer-networking products are vital to an economy and culture still adapting to the Information Age – just as automobiles were essential to America in the 20th Century."

John A. Prestbo, editor and executive director of Dow Jones Indexes, said both Citigroup and GM were retained as Dow components in recent months despite their low prices. "In our judgment, the stocks until now helped the Dow Jones Industrial Average tell the daily story of the stock market. The extraordinary conditions of the severe bear market and recession kept these stocks relevant and representative for a longer period than might have been the case in more normal times."

GM ends an 83-year run as a component of the Dow Jones Industrial Average. GM was added twice, first for about a year and a half in 1915 and second on Aug. 31, 1925. The only current component with a longer history is General Electric Co. (GE). GE was in the original Dow in 1896 but was removed and restored a couple of times; it has been a component steadily since 1907.

Citigroup joined the Dow on March 17, 1997, as Citicorp. Ironically, Travelers merged with Citicorp to form Citigroup in 1998, creating what was then termed a "financial supermarket." Citigroup spun off Travelers in 2002.

The changes won’t cause any disruption in the level of the index. The divisor used to calculate The Dow from its components’ prices on their respective home exchanges will be changed prior to the opening on June 8. This procedure prevents any distortion in The Dow’s reflection of the U.S. stock market.