The Economy: The Economy: Happy Holidays! Much of the incoming economic data is coming in above expectations. In addition, a Congressional budget accord has been reached which eliminates the fear of another government shutdown in January 2014. The Fed’s Beige Book is a compilation of what business owners have to say about the macro outlook. The latest release was upbeat. Along with the improving employment picture, it confirms that the economy continues to improve. We’re looking at 3% growth which is a significant improvement over past years. This is in spite of higher taxes, the sequester and the government shutdown. The budget deal will reduce some of the automatic spending cuts from the Sequester. Talking Heads are again saying that the Fed will use this positive news to begin The Taper when they meet next week. We disagree for two reasons. First, we do not believe that outgoing Fed Chair Bernanke will rock the boat before his departure at the end of January 2014. We believe that he will want to leave policy changes to his successor, Janet Yellen. Second, economic growth remains muted. Market driven interest rates have increased dramatically since their May 2013 lows. The Taper will most likely accelerate this trend. Bernanke will want to leave the damage control to Yellen. We continue to see The Taper occurring mid to late first quarter 2014.

Food for Thought: December is when we look back in review. 2013 was a year when politics trumped economics. The Central Bankers “we’ll do whatever it takes” worked. Skeptics abound but the outlook is more positive now, than in the past few years. Equity markets may gyrate with The Taper. They also face the headwind of mid-term elections. But the U.S. economy appears headed for continued expansion as we move into 2014. Keep wearing those ruby red slippers, San Diego in particular will benefit from the reduction in the cuts of the Sequester.

December 11th, 2013

The Economy: Economic numbers that have been released are positive. Retail sales increased more than expected. This indicates that the consumer is healthy. Since the consumer represents 70% of the economy, this strength should continue to support growth. Inflation fell more than expected and excluding the crash is now near 50-year lows. The Fed was front and center with Janet Yellen indicating that she will continue with the policies of Ben Bernanke. Fed Chair Bernanke spoke to a group of business economists clarifying the Fed Stimulus. He stated the Fed’s balance sheet will remain large and short-term rates near zero for a long period, “perhaps well after the unemployment threshold is crossed.”  This will continue to be stimulative as the Fed looks for a lot more signs of economic improvement before any consideration of monetary tightening.  Interpretations range from a dovish take to a hawkish take, depending on which sentence is being scrutinized.

Food for Thought: Pundits say that Bernanke’s speech and the Fed Minutes crashed stocks and bonds. In reality, Bernanke has been consistent in his comments for the past several months. He has made it clear, and Yellen has confirmed, that the Fed will do whatever it takes to keep the economy growing. Taper Talk is premature. Market interest rates will continue to fluctuate over time. But the idea that the Fed is going to actually raise interest rates any time soon, is unfounded. Thanksgiving is next week. We will not publish. Happy Thanksgiving to you and yours. Be safe and pick us up in the first week of December.

November 22nd, 2013

The Economy:  Small business optimism declined in October as participants saw less of an improvement in the economy and sales. Some of this due to the government shutdown. As we move into the holidays, eyes are on the transition at the Fed. Janet Yellen, Bernanke’s heir, made her first appearance in front of Congress. She carried the day and was well received. No one expects policy initiatives out of this. We continue to see little change from the Fed well into the first quarter of 2014. Talking heads have 24/7 broadcast time to fill, so they’re full of speculation. But a steady hand is expected during the Fed transition. The Bernanke Fed’s policies have been unprecedented. The idea that the apple cart is going to be upset at this late date is far-fetched.

Food for Thought: Whether it’s lemmings, sheep, QEinfinity, self fulfilling prophecy, luck, or brilliant investing prowess, traders are positioned for stocks to head up for the rest of the year. Or to quote our good friend Ralph Kramden, “BANG, ZOOM! Straight to the moon, Alice!” We saw this type of market in 1987, 1999 and again in 2007. At this point in the trajectory most investors are swearing that they’ll ride out a downturn. But it doesn’t play out that way. Most turn a profit into a loss then sell at the bottom. Don’t let it happen to you. Set loss limits and protect yourself. If you know of someone we could help with these issues please contact us. In the meantime, let’s continue the dance … after all, the punchbowl is still there.

November 13th, 2013

The Economy: The ECB cut interest rates to historic lows in acknowledgement that deflation is still problematic there. In the U.S. we have a solid start to the 4th quarter. The jobs report came in better than expected this morning. Factory orders rose after 2-months of declines. Manufacturing was reported above consensus.  But the Friday jobs number will overshadow all other numbers this week. The impact of the government shutdown is proving to be difficult to assess. Thus far it’s proven to be case by case on a local basis. Economists evaluating national data disagree among themselves about the impact. However, we are seeing government officials, business owners and executives less than optimistic. Part of this attitude is because some of the issues that caused the shutdown have been kicked down the road into January 2014. While we don’t see the bruising political fight revisited, the uncertainty remains. Further uncertainty is being caused by renewed Taper Talk. This boogeyman will be with us until the event actually occurs. But we are doubtful that anything will occur until well into the first quarter of 2014. Fed Chair Bernanke has no incentive to tarnish the end of his term with a change in policy that is going to have unpredictable consequences. So we see no change for the remainder of 2013. Janet Yellen will assume Bernanke’s job in January 2014. We don’t foresee any change in the status quo until she gets settled in. Hence our call for no action until well into the first quarter.  … if then.

Food for Thought: The Holidays will soon be here. This is the time for parties and cocktail conversations. The stock markets are in full swing as we go into the end of the year. So here are some tidbits to share around the punch bowl: The S&P 500’s return has been positive in November and December every year since the bull market started in 2009.The S&P 500 has risen in the final two months of the year 82 percent of the time since 1928 when the benchmark gauge advanced at least 10 percent through October. The mean November and December increase of 6 percent would lift the S&P index to 1,862.79, an all-time high. We also trade stocks here at Higgins Capital. If you are interested in trading stocks, or if you know of friends or family that have an interest, please contact us. Drive safe, be safe, have a great weekend.

November 10th, 2013

The Economy: Halloween and the goblins at the Federal Reserve continue to stir the pot. The statement released at the end of their meeting this week, was little changed from last month. But it was perceived as being more hawkish. We see little difference. The Fed has assumed control of the U.S. economy. Like Syria, Taper Talk has faded. At the beginning of 2013, expectations were for a reduction in QE before year end. Now, almost $1 Trillion into it, talk of reducing the program has been pushed into 2014. The Fed continues to prime the pump while looking for a self-sustaining economy.

Food for Thought: Historically low interest rates are challenging investors looking for income. The traditional safe haven of government bonds is no longer working. Finding higher yields means accepting higher risk. There is no other solution. Nowadays, a combination of sovereign debt, corporate bonds and dividend paying stocks must be used. Contact us if you have questions on how to increase your income.

November 1st, 2013

The Economy: For some time now we’ve been commenting on how the economic numbers have been mixed. Yesterday the delayed September employment report was released. It was abysmal. The U.S. economy was weak before the shutdown. We believe it will show further weakness because of the Washington Follies. This mean that Taper Talk has been pushed out into 2014 as the Fed will want to see just how the economy is actually recovering. Perma-Bear Marc Faber made an interesting comment on the Fed and QE: “The question is not tapering. The question is at what point will they increase the asset purchases to say $150 [billion] , $200 [billion], a trillion dollars a month,” Faber further said, “… every government program that is introduced under urgency and as a temporary measure is always permanent. …The Fed has boxed itself into a position where there is no exit strategy.” We think Marc should move to his bunker in Montana. We expect to continue to see mixed economic data as we move through the weakness courtesy of our Government By Crisis. … and the Circus will be back in town in January 2014 for a prelude to election year pandering to the press. We advise clients to continue to invest given the information available today. The Fed rules the economy; Congress has no credibility in the markets. “Any idiot can face a crisis, it’s the day to day living that wears you out.” – Anton Chekhov. Americans are worn out with Washington.

Food for Thought: 40% of the U.S. budget is spent on defense. It is the equivalent of the next 20 countries combined. San Diego has 6 major Navy and Marine Corps facilities with more than 120 ships including aircraft carriers and submarines. 140,000 military and Department of Defense employees work in this sector of the local economy. These men, women, magnificent machines and their missions are  serviced by 32 major defense contractors, and thousands of smaller businesses. More than $10 billion in direct salaries pour into San Diego County annually. Though some cut backs are expected short term, the longer term is bright. The “Pivot to the Pacific” will see a greater Navy presence in San Diego as resources are moved west. The traditional 50-50 split between the Navy’s Atlantic and Pacific Fleets is about to change. The new fleet split will be 60-40 as U.S. national policy focuses on China. Blue Skies in San Diego County.

October 23rd, 2013

The Economy: “To default or not to default, that is the question. It might be moot by the time you read this. … The manufactured crisis in Washington has resulted in Fitch’s putting the U.S. debt on credit watch for a downgrade. This is one of the credit rating agencies that was excoriated by Washington for allowing the 2008 financial meltdown through lax oversight. Now the rating agencies fall all over themselves to downgrade U.S. debt. Quid pro quo in the government-official-to-business-to-government-official that is the revolving door of the Twilight Zone on the Potomac. So it goes as global markets have yawned through the show. Indices are back near their highs and interest rates are benign … except for the very short end of the bill curve where propeller heads lurk. The astute political timing of the foregone Yellen announcement salved markets with knowledge that zero interest rates are permanent. The few economic releases during this government shutdown confirm that there’s still a pulse. … and let’s be serious, do you even remember the 1995-96 shutdown? Nobody does. It puts the current charade into perspective. Remember: The end of the world bet has never been profitable.

Food for Thought: From Carnac the Magnificent comes the following: On interest rates, the Yellen Fed will maintain zero interest rates as official policy to infinity and beyond. The Taper has been driven into hibernation and may not emerge until Ground Hog day 2014. Interest rates could fall back to their pre-May 2013 levels. On stocks. ,the consensus is that markets will rally to new highs. Buy the dip is gospel. The global economy is improving. The Fed is onboard with unlimited juice. It brings to mind Bob Farrell’s rule # 9: “When all the experts and forecasts agree — something else is going to happen.” If someone you know has questions about how to make more money in these baffling times, have them contact me.

October 16th, 2013

The Economy: We believe that the government shutdown/debt ceiling will be resolved before the wheels come off. Neither side of the aisle wants to be cast as crashing the economy. But the wrangling is more complicated this year. The President is not going to abandon Obamacare.  House Speaker John Boehner risks losing his job if he compromises. A week into the impasse and there has been no noticeable economic or market cost to the shutdown. So if it ain’t broke, why fix it? Economic data released by the government has stopped without obviously impacting life as we know it. It says a lot about the information overload we’ve all grown to love. That being said, the game of chicken being played in Washington is a dangerous one. Things could change overnight but the longer the shutdown persists, the more the economy will be adversely impacted. But fear not. As The Economist recently stated, “…no politician wants to explain to Grandma why he stopped her Social Security cheque.” We’ll bet the odds on a resolution.

Food for Thought: Today President Obama announced the nomination of Janet Yellen to replace Ben Bernanke as the Chair of the Federal Reserve. The move was widely expected after Larry Summers withdrew last month. Yellen gets high marks across the board. She’s seen as a dove and expected to continue many of Bernanke’s policies. She’s expected to be easily confirmed. Yellen at the head of the Fed removes one of the uncertainties from the economic picture. It may even relieve pressure on the Fed to embark on the Taper until next year. Given the government shutdown and the debt limit circus we don’t expect any action from the Fed during their meeting this month.

October 12th, 2013

The Economy: Who cares? … the more things change … Washington has been called the new Rome. … and as jaded Romans knew, all the people cared about was bread and circuses. The Fed has given us the bread and now the Fools on the Hill are continuing with the circuses … as that god of alliteration, Agnew, might have said, “Preening pols pursuing pathetic personal pranks.”

1976  September 30  October 11:  10-days.  Citing out of control spending, President Gerald Ford vetoed a funding bill for the United States Department of Labor and the United States Department of Health, Education, and Welfare (HEW), leading to a partial government shutdown. On October 1, the Democratic-controlled Congress overrode Ford’s veto but it took until October 11 for a continuing resolution ending funding gaps for other parts of government to become law.

1977  September 30  October 13:  12-days. The Democratic-controlled House continued to uphold the ban on using Medicaid dollars to pay for abortions, except in cases where the life of the mother was at stake. Meanwhile, the Democratic-controlled Senate pressed to loosen the ban to allow abortion funding in the case of rape or incest. A funding gap was created when disagreement over the issue between the houses had become tied to funding for the Departments of Labor and HEW, leading to a partial government shutdown. A temporary agreement was made to restore funding through October 31, 1977, allowing more time for Congress to resolve its dispute.

1977  October 31  November 9:  8-days.  The earlier temporary funding agreement expired. President Jimmy Carter signed a second funding agreement to allow for more time for negotiation.

1977  November 30  December 9:  8-days.  The second temporary funding agreement expired. The House held firm against the Senate in its effort to ban Medicaid paying for the abortions of victims of statutory rape. A deal was eventually struck which allowed Medicaid to pay for abortions in cases resulting from rape, incest, or in which the mother’s health is at risk.

1978  September 30  October 18:  18-days.  Deeming them wasteful, President Carter vetoed a public works appropriations bill and a defense bill including funding for a nuclear-powered aircraft carrier. Spending for the Department of HEW was also delayed over additional disputes concerning Medicaid funding for abortion.

1979  September 30  October 12:  11-days.  Against the opposition of the Senate, the House pushed for a 5.5 percent pay increase for congress members and senior civil servants. The House also sought to restrict federal spending on abortion only to cases where the mother’s life is in danger, while the Senate wanted to maintain funding for abortions in cases of rape and incest.

1981  November 20  November 23:  2-days.  President Ronald Reagan pledged that he would veto any spending bill that failed to include at least half of the $8.4 billion in domestic budget cuts that he proposed. Although the Republican controlled Senate passed a bill that met his specifications, the Democratic House insisted on larger cuts to defense than Reagan wanted and for congressional and civil servant pay raises. A compromise bill fell $2 billion short of the cuts Reagan wanted, so Reagan vetoed the bill and shut down the federal government. A temporary bill restored spending through 15 December and gave Congress the time to work out a more lasting deal.

1982  September 30  October 2:  1-day.  Congress passed the required spending bills a day late.
1982  December 17  December 21:  3-days.  The Democratic controlled House and the Republican controlled Senate wished to fund jobs, but President Reagan vowed to veto any such legislation. The House also opposed plans to fund the MX missile. The shutdown ended after Congress abandoned their jobs plan, but Reagan was forced to yield on funding for both the MX and Pershing II missiles. He also accepted funding for the Legal Services Corporation, which he wanted abolished, in exchange for higher foreign aid to Israel.

1983  November 10  November 14:  3-days.  The Democratic controlled House increased education funding, but cut defense and foreign aid spending, which led to a dispute with President Reagan. Eventually, the House reduced their proposed education funding, and also accepted funding for the MX missile. However, the foreign aid and defense cuts remained, and oil and gas leasing was banned in federal wildlife refuges. Abortion was also prohibited for being paid for with government employee health insurance.

1984  September 30  October 3:  2-days.  The House wished to link the budget to both a crime-fighting package President Reagan supported and a water projects package he did not. The Senate additionally tied the budget to a civil rights measure designed to overturn Grove City v. Bell. Reagan proposed a compromise where he abandoned his crime package in exchange for Congress dropping theirs. A deal was not struck, and a three-day spending extension was passed instead.

1984  October 3  October 5  1  The three-day spending extension expired, forcing a shutdown. Congress dropped their proposed water and civil rights packages, while President Reagan kept his crime package. Funding for aid to the Nicaraguan Contras was also passed.

1986  October 16  October 18:  1-day.  A dispute over multiple issues between the Democratic controlled House and President Reagan and the Republican Senate forced a shutdown. The Democratic controlled House dropped many of their demands in exchange for a vote on their welfare package, and a concession of the sale of then-government-owned Conrail.

1987  December 18  December 20:  1-day.  Democrats, who now controlled both the House and the Senate, opposed funding for the Contras, and wanted the Federal Communications Commission to begin reenforcing the “Fairness Doctrine”. They yielded on the “Fairness Doctrine” in exchange for non-lethal aid to the Contras.

1990  October 5  October 9:  4-day.  President George H.W. Bush vowed to veto any continuing resolution that was not paired with a deficit reduction package, and did so when one reached his desk. The House failed to override his veto before a shutdown occurred. Congress then passed a continuing resolution with a deficit reduction package that Bush signed to end the shutdown.

1995  November 13  November 19:  5-days.  In the shutdown of 1995 and 1996 President Bill Clinton vetoed a continuing resolution passed by the Republican-controlled Congress. A deal was reached allowing for 75 percent funding for four weeks, and Clinton agreed to a seven-year timetable for a balanced budget.

1995  December 16  January 6, 1996:  21-days.  Subsequently the Republicans demanded President Clinton propose a budget with the seven-year timetable using Congressional Budget Office numbers, rather than Clinton’s Office of Management and Budget numbers. However, Clinton refused. Eventually, Congress and Clinton agreed to pass a compromise budget.

2013  October 1:  Ongoing  Ongoing  Due to disagreement regarding inclusion of language delaying the Affordable Care Act, the Government has not passed a funding bill. Negotiations have come to a stop and government shutdown is in progress. See also United States federal government shutdown of 2013.

Food for Thought: … after the above nonsense!?!?! … Duck and Cover.

October 2nd, 2013

The Economy: We’re in the midst of the annual Washington budget/debt ceiling dance. Never let a crisis go to waste, says an old rule of politics. But know that it will be resolved. In the interim, the noise from the Talking Heads is deafening. With 24/7 news channels, they have to make news when there is none. Week to date most economic news has been positive. The housing sector continues to perform in spite of higher mortgage rates. Mortgage application rose as did new home sales. The ECB and the EC won a reprieve with Merkel’s landslide election. Syria is no longer newsworthy. The President’s speech at the UN was well received. US stock markets have been selling off into the weak part of the year. The euphoria that met the Fed’s punt on the Taper has dissipated. There are two more Fed meetings this year. Talk is split on whether we’ll see Fed Taper action in December or not until 2014.

Food for Thought: Bridgewater Hedge fund founder Ray Dalio put out a video titled “How the Economic Machine Works: Leveragings and Deleveragings.” See it here. It’s a refresher for finance professionals and insightful for all. He emphasizes the 10-year recovery cycle that follows financial crises. Ours began in 2008. According to Dalio that puts us at the half way point in 2013.

September 25th, 2013