Wednesday, August 26, 2009

Federal Express, UPS or USPS?

From the Desk of Joe Rollins

You might think that the above title is unusual, but over the last week I have become somewhat introspective about the healthcare reform debate, and it’s made me wonder which of the above companies I would want to manage my healthcare plan. They’re all in the exact same business, right? Would I want the private sector, represented by Federal Express and UPS, to manage my healthcare? Or the bumbling, incompetent and completely bureaucratic disaster that is the United States Postal Service? As I’m sure you’ve guessed, it didn’t take me very long to come to my decision.

I know I’ve said it before, but I want to point out to you just how incompetent our government is at doing virtually everything in comparison to the private sector. I’m going to give you a few thoughts to ponder regarding the public healthcare option that the Obama Administration is trying to force through Congress at the current time.

But before I get into that discussion, I want to reflect on the current U.S. financial markets, which have been nothing short of stunning for the last five months. The S&P 500 Index is now up 15.6% for the year. Remember that we endured a disastrous year during 2008 when the S&P lost 37%, so the gains for 2009 are even more remarkable when you think about where we were a year ago.

Looking back at the last five and a half months, on March 9, 2009, the S&P was at 660. This past Friday, the S&P closed the day at 1,026 for a stunning gain of 55% in the intervening months. Even more impressive is that the NASDAQ Composite closed Friday at 2,021. This represents a stunning increase of 60% over the past five and a half months. Although we hear nothing but gloom and the doom from the financial media, I’m hard-pressed to think of a time when the financial markets have rallied so impressively at such a fast pace.

While it is true that the economy is less than stirring at the current time, the financial markets typically do not reflect the current economic situation. Rather, the financial markets forecast the future, and it is now absolutely clear that the U.S. economy is on the mend. I believe it’s almost a given that the 3rd quarter of 2009 will reflect positive GDP growth, which is months prior to when it is forecasted that the economy will turn.

Many developed countries have now reported positive GDP growth for the 2nd quarter of 2009 even though the U.S. continued to have negative GDP growth. For example, Japan, Germany and France all reported positive GDP growth this past week. Asian countries never reflected a negative GDP growth during this time and countries such as China and India have continued to reflect strong, positive GDP growth.

Even with all the serious unemployment the U.S. is trying to overcome, the economy reflects that it’s on the mend. Again, the financial markets are not reflecting the circumstances of today; rather, they are reflecting the realities of tomorrow. As the economy continues to improve, the financial markets will reflect even higher profits and stock prices.

I am often baffled by investors who refuse to invest because of the economic turmoil they see occurring at the current time. Current economics has nothing to do with stock market investing. If you have waited the last five and a half months to invest due to the influence the financial media has had on your opinion of the U.S. economy, then you have missed a great wealth building opportunity. Regardless, I still don’t think it’s too late for you to invest. As I always say, you shouldn’t invest for today or tomorrow; rather, the point it to invest for 10 plus years from now.

You may rest assured that the financial markets as we know them today will sell at many times the current level 10 years into the future. Why some investors focus on the performance of the day, week or month has always been a mystery to me. Investors who sell out during bad times often never make the decision to reinvest, but as the last sell-off has demonstrated, they still would’ve been better off remaining invested than to have not been invested at all.

Now, on to my current soapbox rant… It’s amazing that certain members of our U.S. Congress are arguing that it’s only possible for the government to bring the economy out of recession. The incompetence of our government is so legendary I can’t even imagine turning over 30% of the U.S. economy for them to manage – this is what the healthcare reform plan would represent.

It has been proven that if you return money to the taxpayers, they will use it to improve the economy. The “Cash for Clunkers” program has been operational for only a few months, but it has already pumped $3 billion dollars back into the economy. Furthermore, it increased production capacity for the automobile manufacturers, creating jobs for Americans. Additionally, it took nearly 700,000 “junk” cars off the road and put Americans in newer, safer and more fuel efficient cars. This is the type of tax incentive that creates commerce and pulls the economy out of recession. It is not government that created these jobs; it is government returning the money back to the taxpayers who paid it to them in the first place.

Even so, this highly successful program has run into some major problems, mostly because of the ineffective way it is being run by the government. Even though the dealers advance the money to car buyers promised by the government for their clunkers, the government has been slow to reimburse the dealers for their advances. This failure on the government’s part has put many dealers in financial strife.

As of today, almost $3 billion has been committed in clunker rebates. However, the government has only reimbursed dealerships $147 million of that $3 billion – roughly 7% of the total extended by dealerships. This is just another example of the gross incompetence the government exercises when it attempts to operate in a free enterprise. Do you really want these people to manage your healthcare program?

Driving to work the other morning, I noticed a great deal of construction on Peachtree Street. There were two crews digging along the side of the road, one of which had a crew member in a hole with a shovel while five other guys stood around and intently watched him work. This certainly doesn’t seem like the most efficient way to dig a hole to me! The second crew was a little more efficient; they only had four guys drinking coffee and blocking traffic on Peachtree Street as commuters tried to make their way into work.

Last year, the City of Atlanta’s budget ran a deficit of $64 million because they did not understand the difference between capital improvements and operating costs. Duh?!? When Shirley Franklin was first elected, she assured us a more efficient Atlanta government. According to the Atlanta Journal-Constitution, the city of Atlanta has 20% more employees now than when Mayor Franklin entered office. This is just another example of how government continues to get bigger and bigger while growing more inefficient than ever. We will never control the size of the government until taxpayers stand up for less government, less taxes, and fewer items sponsored by the government.

Remember my previous comments about the stoplight situation on Peachtree Street? Is it surprising to you that the City of Atlanta does not have a synchronized traffic light system? Nearly every developed city in the world has a synchronized traffic light system, but the City of Atlanta doesn’t, and I can only assume that’s because of its incompetence. It is not a matter of money – they have plenty of money to waste – it is a matter of competence. All City of Atlanta taxpayers need to reflect on what value they are getting for their taxes. While everyone in the world complains about Atlanta traffic, our local government has proven to be completely inept at making any improvements.

I also find it very interesting that the U.S. government is sponsoring a plan to loan up to $10 billion to Brazil to fund deep water drilling for new oil discoveries off the shore of Rio de Janeiro. It is quite likely that China will actually get the opportunity rather than the U.S. because they are offering more money and better terms. Additionally, China is funding deep water drilling off of Cuba in order to guarantee future oil deliveries since they have a shortage in natural resources.

What I find interesting about this development is that the U.S. government will not even fund drilling in the United States, but they are willing to fund drilling in Brazil. What is wrong with this picture? Even though we all agree that the shift to more favorable energy sources is desirable, it is a pipe dream to believe that in 15 or 20 years we will be off fossil fuels entirely. Now that China has essentially locked in supplies from Brazil and Cuba, where will the United States get its oil? It seems that everyone in Washington is focused on fulfilling dreams at the jeopardy of the realities that will ensue over the following decades.

Late in the afternoon this past Friday, the White House announced that the 10-year projected deficit has been increased by $2 trillion. Perhaps they’ve found it helpful to announce such terrible news late on a Friday afternoon in the dog days of summer. Even with all the complaints regarding George W. Bush’s deficits in the last years of his administration, the deficits projected over the next decade make George Bush’s deficits look like rounding errors. Is this really the direction that Americans wants their Federal government to take?

One of the more interesting controversies in the current debate regarding healthcare reform is Congress’ continued assertion that medical insurance companies are not competitive. The reason that medical insurance companies are not competitive is principally because of government itself. Each state sanctions which medical insurance providers can operate in their state while restricting competition. If insurance companies could sell across state lines and if there were some universally accepted standards that medical insurance providers would have to abide by, then competition would be enormous.

There is no shortage of medical insurance providers. But with government intervention, competition is not allowed to flourish. If the government would provide the benchmarks and then allow the insurance companies to compete across state lines, there would be ample competition to bring down the cost of medical insurance premiums. Regrettably, I don’t ever envision a situation where our current Congress would ever want to get their fingers off the control button of healthcare, which is a large portion of the American economy.

I could not help but be amused by Paul Krugman’s opinion piece in Friday’s issue of The New York Times. I often mention Paul Krugman in these posts. He is an economist that supports socialized government. He was also one of the largest supporters of Barack Obama when he was running for president. Unfortunately, he has been wrong very often about many things and now he has lost total credibility in my mind. After all, it was he who said it was necessary for all the banks in America to be nationalized in order to survive. He was so very wrong on that point.

In Friday’s opinion piece, Obama's Trust Problem - The New York Times, Krugman griped that the Obama Administration is not liberal enough. His argument is that only government can properly provide healthcare. However, since the Obama Administration has seemingly abandoned the socialistic goals Krugman advocates and is willing to consider something other than a complete nationalization of the health plan, Krugman has become very critical of Obama. It appears that the Left is turning against the President they so badly wanted in office.

I have gotten in the habit of reading Paul Krugman’s articles faithfully just to see how wrong he can be. In one of his pieces last week, he claimed that the Federal government is what saved us from economic disaster, stating, “What saved us? The answer, basically, is big government. We appear to have averted the worst: catastrophe no longer seems likely and big government, run by people who understand its virtues, is the reason why.” I’d like to ask Paul Krugman a question similar to the one Congressman Barney Frank posed to a nut job at a town hall meeting last week – “What planet are you from??”

CNNMoney recently reported that only $120 billion of the $720 billion of the infamous stimulus funds has actually been spent. The total spending for the stimulus bill to date is less than 1% of the GDP. It doesn’t make sense for Krugman to assert that such a small expenditure by the Federal government could have turned around an economy that lost 6% of GDP in the 4th quarter of 2008 to turn into a positive GDP growth in the 3rd quarter of 2009. The question all taxpayers should really ask is, if the stimulus money spent thus far has only produced a 1% positive GDP growth and the economy turned around without it, why not forego spending the rest of the money that’s been appropriated?

Since we are facing the most staggering deficits ever in the history of the United States, maybe returning the unspent $600 billion left in the stimulus bill could help this matter. If taxpayers do not get involved in cutting the spending of Congress, we will truly face deficits of monumental proportions.

I wish financial commentators would at least check their facts before they make statements that are not supported by reality. Paul Krugman’s assumption is that only countries with big governments can have economies that prosper and have better welfare for their people, and that only the government can control banks and properly provide healthcare to its people. This has been the socialist versus capitalist argument since the beginning of time, where socialists believe that only the government knows what you need and only the government can furnish it. However, capitalism has been incredibly successful in the United States, and in my humble opinion, the government is not the reason for its success.

You may be asking what the facts are for why capitalism works better than socialism. If you look at the countries with the largest government spending, you will see that they have suffered through the worst recession over the last year. For example, Sweden, which spends 52.6% of its GDP on government items, had a negative GDP growth of 6.2% over the last four quarters. Italy spends 48.5% of its GDP on government and has had a negative GDP growth of 6% during the same timeframe. The United Kingdom, which spends 41.8%, has suffered through a negative GDP growth of 5.6% over the last year. The United States spends 36.6% of its GDP on government, and has suffered a negative 3.9% economic decline. From these numbers, it seems to me that big government does not guarantee a good economy.

So, what countries spend the least on government and what is their corresponding GDP growth? China spends only 30% of their GDP growth on government, and they’ve enjoyed a 7.9% GDP growth in the last year. India spends the least on government at 20.4% of GDP and their growth has been 5.8% over the last year. How can Paul Krugman make such an argument when it is clearly not supported by the facts?

I don’t want you to think I feel negatively about our economic and financial futures; Americans seem to be rising up to fight big government, and I am optimistic that taxpayers see what is going on in Washington and will stop it cold in its tracks. Deficits cannot continue to grow exponentially over the next decade and still allow the country to prosper. The only way to avoid economic disaster is to remove our current Congress and elect officials that are responsive to America’s needs, not some fantasies that they’ve created in their own minds that are not supported by economic reality.

As Congress returns in September to debate the healthcare reform matter, just consider some of the items that I’ve mentioned in this posting. Our government is ill-equipped to do anything well except administer our defense program. Every other facet of government should be privatized and returned back to basic capitalism. While everyone wants healthcare reform and it’s obviously something that’s desperately needed by all, the last thing we need is a government-controlled healthcare system. It will surely create a boondoggle of gigantic deficits that we will never be able to overcome along with an inept medical care program. Again, this is the basic argument of capitalism versus socialism. I vote for capitalism.

As always, the foregoing comments are my opinions, thoughts and personal biases. In all cases, I could be wrong.

Thursday, August 13, 2009

Please – Divorce Your Children Now!!

From the Desk of Joe Rollins

The following post was originally published in my old quarterly newsletter, The Rollins Report, in 2006. Almost every week, a client tells me about the horrors they are facing after putting their children through an expensive college. Most of the time, the graduate finds no viable employment opportunities available to them. I directed this article at parents who are financing their children’s education on their dime without providing any direction to their children on the focus of their education. Of course, the title of this post is cynical, but I do hope you’ll read my suggestions and try to follow some of the guidelines I recommend.

When I graduated from college, the last thing I wanted to do was move back home to live with my parents. More importantly, I’m certain my father would never have allowed that to happen. This wasn’t due to finances; it had more to do with it being time for me to move on to the second phase of my life.

Almost every week, I have discussions with parents who’ve allowed their children to move back in to their homes after graduating from college, where they can basically come and go as they please. These children often obtain menial jobs, but spend every dime of their earnings without contributing at all to the household expenses. Worse than all of that, many times the children have no incentive for establishing their own livelihood, and therefore, they are perfectly comfortable having Mom and Dad pay all of the expenses associated with their living arrangements. If you are in that particular situation, I think it’s wise for you to ask yourself if you think you’re doing your child a favor or a disservice. By agreeing to subsidize their lifestyle, parents are not preparing their children for the reality of dealing with their own financial obligations in the real world.

One of the more controversial topics that I discuss with clients pertains to financing their children’s college educations. It is a standard in the financial planning industry that parents should never incur any form of debt to provide for a child’s education unless they have first completely provided for their own retirement. The theory is relatively simple – a child has a lifetime to pay off any debts they incur in obtaining a college education, but parents only have a short period of time to pay off those debts, and doing so becomes more difficult in retirement years.

The financial planning industry standard is that unless you have already saved 100% of your own retirement, then your children should borrow money (or get a part-time job) to provide for their own college education; the parents should not be financially responsible. I know that this statement is controversial and that many of my readers will disagree with this concept, but I personally believe that the theory is correct and that parents should not incur any debt to finance their children’s college educations if they have not provided for their own retirement.

Another item that has created a lot of controversy with my clients is my opinion on allowing a child to dictate which college they will attend (on their parents’ dime, of course). I believe you have an obligation to your children to point them in the direction of obtaining a quality education, but it should not come at a cost that will break the bank or risk your retirement. Many high schools today are directing children to very expensive private liberal arts colleges that only provide a general higher education. In almost every case, these schools are very expensive compared to public institutions.

There is absolutely nothing wrong with directing your children to attend an affordable, quality public college that is close to home. I find it amusing when clients tell me that their children are demanding to attend an out of state institution (usually somewhere in Colorado for some reason).
While Colorado has excellent colleges, their curriculum is often just as good (and sometimes worse) than schools in Georgia. Therefore, the money spent to go to some colleges is certainly not warranted by the credibility you would get from a degree from one of those institutions.

In one particular case, when I questioned why a client’s child wanted to attend a college in Colorado, I was told it was because he liked to ski. I couldn’t help but point out that it would be much cheaper to send their son to the University of Georgia and fly him to Colorado every weekend to satisfy his skiing appetite. Besides that, he would probably get a better education and be closer to home.

The other comment I hear from too many parents is that their children just want to get away from home. If you live in Marietta and your child goes to Georgia Tech and lives on campus (only 15 miles away), that is plenty of distance for a child to feel all the freedom they need. It is imperative for parents to discuss with their children that it’s more important to obtain a quality education than it is to attend an expensive institution. If parents or children have to borrow significant sums of money to finance a child’s education, then they are doing themselves and their children a disservice.

Along the same lines, I am often amazed by parents who set up accounts for their children without ever discussing the importance of saving and budgeting with them. This only leads to trouble down the road for the child (and of course, you).

Another great tragedy in America today is that all college kids are given credit cards upon arrival at campus. They are allowed to use these credit cards however they wish and they typically wind up incurring a ridiculous amount of debt before graduating. For example, I recently visited a college town and ate at a typical hamburger joint for dinner. I was sitting by a group of 15 students eating hamburgers and drinking sodas. I noted that every single student paid for their individual tab with a credit card. While credit cards are certainly convenient, I do wonder whether their parents ever discussed the dangers of getting into credit card debt with them. Have you?

I don’t think it’s inappropriate for parents to discuss with their children the money that they’ve set aside for them. While it can be discussed at the time the parents decide to give the funds to their children (if they are still alive at that time), I recommend that it be done before then. I have seen too many children inherit large sums of money without any type of direction from their parents as to how to spend it or invest it, nor have they ever been advised on the manner in which it is intended to be used.

Another gripe I have about parents and college education is that children often major in subjects that are completely irrelevant to obtaining a job. While it may be great to be a Latin major or study medieval history, it qualifies a college graduate for virtually nothing. I think it is the parents’ responsibility to emphasize to their children that their degrees need to be in subjects that will allow them to obtain a job that will support the child’s financial needs. How is your child going to support their expensive habits while you are paying for them?

It hardly seems appropriate to me for anyone to incur debt to obtain a college degree when the only thing they are qualified to do is wait tables. This, of course, is fine if the parents are not expected to supplement their child’s income when they cannot pay for their own cost of living. If you allow your children to waste their education on an irrelevant degree, you will spend many years paying for that poor decision.

My intention is not to advise you to abandon your children as soon as they graduate from high school, but the fact of the matter is that you need to save for your own retirement first and then begin a savings plan for your children’s educations. One method for saving for higher education that I highly recommend is that all parents establish a 529 plan when a child is born so that there will be money available to them when they reach college age.

I am certain that all parents reading this blog could afford to put away at least $300 a month for a child’s education. But, I think simply putting money away is not a parents only obligation. The obligation extends to you counseling your children about the money, suggesting quality colleges that are nearby and affordable, and encouraging your child to go into fields of study that will allow for a fruitful financial future.

Every time I mention a 529 savings plan to a parent who will soon have college-age children, I get nearly the same excuse. They’ll either say they plan on putting some money aside for their child’s education when they get a bonus or an unexpected amount of cash, or they’ll simple provide for that child’s college education when the time comes. That’s all well and good if you do get a bonus or if you’re able to pay for it when the time actually arrives. It’s amazing, however, how much money can be accumulated in an education account for your child if you only deposit the small $300 amount as indicated above. The magic of compounded interest would allow you to accumulate a significant amount of money during the child’s adolescence.

For example, if you save $300 a month for 18 years and the account only earns a nominal 5%, you would have over $106,000 available for your child when they reach college age. If you started saving a little later and only saved for 15 years before the child reached college age, you would still have in excess of $81,000 accumulated. In the worst case scenario, if you’ve only saved for five years before your child reaches college age, you could still accumulate over $20,000. My point is that it’s never too late to start to save money for your child’s higher education.

As I’m sure you’re aware, Rollins Financial can establish 529 plans, Coverdell Educational IRA’s or custodial accounts for your children to help you begin this important savings process. The absolute best way to provide for these accounts is to have money drafted out of your checking each on a monthly basis and moved directly into the investment account that we would manage on your behalf. I truly cannot imagine that there are very many clients of this firm that cannot afford a program such as this. Furthermore, I honestly doubt that my clients would miss this sum of money on a monthly basis.

Finally (and most importantly), at some point, it is time to cut the apron strings to your children from a financial standpoint. I encourage all parents to establish an age that they believe their children should be financially independent and advise your children accordingly. Then, when your children reach the age that you discussed, they are on their own to succeed or fail. Establish a date, advise your child of that date, then kick them out of the nest when that day arrives.

Parents that continue to support their children for years after they have graduated from college are not benefiting themselves or their children. A child needs to be given a goal to reach, and when the day comes that they have reached their goal, then they need to be turned loose to provide for themselves financially.

Again, I am not recommending that you abandon your child from an emotional standpoint. They need to be emotionally supported by you as long as you are around. However, I believe that financially, there needs to be a day when you take them off your payroll and divorce your children. Review your current situation; could I be addressing you?

Tuesday, August 11, 2009

Adventures on the Left Coast

From the Desk of Joe Rollins

With only one week left before my son, Joshua, returns to school (he’s 14 now, if you can believe it!), I decided to take him on a golfing excursion to some of the more famous golf courses in the Monterey Beach area last week. Today I want to provide you with some of my thoughts stemming from that trip and my personal impressions of the “bad economy” we are all supposedly suffering through. As information, there wasn’t a single empty seat on any of the flights I took during the entire trip. If the airline industry isn’t making money at this point, then it must be an unforced error on their part.

While my son was in golf camp during the week, I took a quick trip to Las Vegas, Nevada to meet with some clients. The week proved to be exhausting, and I was more than ready to come home, especially since I was tired of buying $15 glasses of wine. Whenever I go out of town, I must admit that I always look forward to going home. One of the true pleasures of traveling is to hear the flight attendant announce that, “We are making our final descent into Atlanta, and we will be landing at Hartsfield-Jackson International Airport soon.” Atlanta is my home, and in most cases, I prefer to be here than elsewhere.

As I sit here dictating this post with Bob Marley and the Wailers playing in the background, I cannot help but feel relaxed. I’m sure that’s no surprise to those of you who are familiar with this artist’s work. This feeling of relaxation is intensified by the fact that I also have the TV on – with no sound – and am watching Tiger Woods play in the World Golf Championship. There’s just no way to have a bad day with this combination.

I am posting a few pictures of me and Josh taken on our California trip. One shows Josh hitting off of Pebble Beach’s famous 18th hole, and another shows him on the legendary par 3 at the 7th hole. Both holes are some of the most celebrated in the golf world. I have also posted a picture of Josh and me on the 5th hole green, overlooking the lonely cypress which marks the end of the peninsula on the 6th green. Interestingly, this hole is in the front yard of Charles Schwab’s house; he didn’t invite me in. If you’ve never had a chance to visit Pebble Beach, I can tell you that it’s truly sensory overload.

You may have noticed from the pictures of Josh that he has grown a lot this past year – about 7 inches, to be exact. He stands close to 6’2” – quite a tall 14-year old, wouldn’t you say? There’s no doubt he gets his height from me.

After traveling so much over the past week, I’ve been pondering the exorbitant amounts of money our country wastes on airline security. A few years ago, a deranged potential terrorist tried to light a bomb in his shoe while on board a transatlantic flight from France. Fortunately, he was unsuccessful. Now, over one million people per day have to take off their shoes and walk barefoot through airport security – the world’s greatest breeding ground for athlete’s foot. I find the amount of money that is spent on security incredible, along with the fact that we hold up millions of travelers just because of the acts of one deranged potential terrorist.

On an early morning flight out of Monterey, California, there were four TSA agents and two passengers going through security. The elderly woman in front of me had to go through the screening machine at least 10 times before she was given clearance. It was sad to watch her take off each piece of her jewelry, including numerous bracelets that apparently set off the machines. Quite simply, it appears that airport security has taken on a life of its own and a much better job could be done with a lot less people and better technology. This may have little to do with the financial world, but it is still of interest to those of us who are subjected to this nonsense while traveling.

In addition to typical security hassles, I had my sixth money clip confiscated by security. I always forget that my money clip has a small knife attached to it, but security always catches it. I now order them in bulk only to turn around and contribute them to TSA. At least I get a tax deduction for them.

I played golf twice in Las Vegas, when the temperature was a blazing 110 degrees. It was quite a contrast from Monterey, where the high of the day was 55 degrees. There haven’t been many times in my life where I’ve visited two cities on the same day where the temperature in one city was double that of the other. I’ve often heard that people aren’t as affected by the heat in Las Vegas because of the low humidity. I can assure you that the high temperature in Las Vegas was significantly more comfortable than when I was cutting the roses in my yard this past Saturday. Atlanta’s humidity makes the temperature almost unbearable, and while it’s certainly hot in Las Vegas, it’s not overbearing.

So, what did my trip out West tell me about our current recession? One thing’s for sure – there were no signs of a recession in Las Vegas when I was there last week! The hotel where I stayed was booked and every restaurant had a waiting list to get in. Whether or not they’re taking in as much money on the gaming is hard to tell from walking through the casinos. Believe it or not, I didn’t wager a single dollar while in Las Vegas. I can tell you, however, that the high price of food and everything else in Las Vegas indicate that if there is a recession in the gaming industry, it will soon be over.

It occurred to me that my clients might like it when I’m out of town. Why? Because in the over one-week period that I was out West, the S&P 500 advanced almost 4%. I wouldn’t be surprised if my clients are taking up a collection to send me out of town more frequently. It is rare in the investment world that there could be such a large, positive move over a relatively short period of time.

The S&P 500 has now advanced exactly 50% since it established its low on March 9, 2009. As of Friday, the S&P was up a stunning 13.7% for 2009, which by any standard is a remarkable recovery from the disastrous year we had in 2008 and the first two months of 2009.

Clients often ask me how, if the market is up 13.7% for the year, the market could not have gained 50%. It is simply the axiom of a multiple from a smaller level. For example, if you have $100 invested in the stock market and it goes down to $50, then a move up of 50% brings you to a balance of $75. Clearly, we’re working out of the hole that was created in 2008, but you must admit that the move has been noteworthy. This makes me wonder how many investors are sitting and waiting for the right time to get back in the market – they’ve already missed a significant move up.

Even when I’m out of town I keep abreast of all the financial news by reading the publications on the Internet. Last week brought good financial news along with good returns for our investments. Friday’s announcement of reduced jobless claims was very encouraging. Even more encouraging was a tick-down in the unemployment rate from 9.5% to 9.4%. As I’ve often said in these posts, unemployment will be the last of the major economic indicators to recover, but at least it is moving in the right direction. I, like most economists, expect that the unemployment rate will still grow, so any move down indicates that at least employers are finally putting some people back to work. You cannot have a major recovery in the economy until more people are working and are able to pay their mortgages and buy consumer goods.

It was also very encouraging to see virtually all economists forecast that even the current quarter will very likely show a positive GDP growth. For those who continue to express the dour forecast of a “double-dip Depression,” they must be discouraged by the economists forecasting such positive growth. It appears that the 4th quarter of 2009 will return GDP growth to a more positive number, even though it will certainly be less than what we would consider to be a robust economy.

For those of you who are really interested in how the U.S. economy has recovered so quickly from such dire circumstances, then you must look to the Federal Reserve. The writing on the wall for a recovering economy is when in the 4th quarter of 2008 the Federal Reserve slashed interest rates and freed up the monetary base to put money into the economy. Their swift actions to prevent a prolonged recession have made the turnaround dramatic and sudden. Without the splendid work of Dr. Ben Bernanke and his dramatic moves to inject liquidity into the economy, such a move would not have been possible.

Dr. Bernanke’s term of office will come to an end in January of 2010. There is even some talk in the liberal press that he should be replaced by someone within the Obama Administration. To even hint at replacing a person of Dr. Bernanke’s intellect and abilities borders on outright lunacy. No Federal Reserve Chairman has ever had to face this type of downward turn in the economy and no one has ever so admirably and successfully performed as well as Dr. Bernanke. He should not only be reappointed, he should be congratulated for a job well done.

I am often asked about the wealth effect and how it affects the stock market. I have argued for years that the reduced values in real estate didn’t have as much of an effect as the reduced value of people’s investments. When your house goes down in value, it still offers you the benefit of somewhere for you to live. The fact that your house is down in value does not affect your net worth until you decide to sell your house. I argue that relatively few people are in that situation since they are not forced to sell their homes. The decrease in your home’s value may make you feel poorer, but it doesn’t have a dramatic effect on your daily expenditures.

However, when your investments decrease in value, you not only feel poorer, it also makes you feel like you can’t afford consumer items. As the stock market increases, you will see investors start to skim some of the profits off of their investments and use that to resume purchasing consumer items. This wealth effect of higher investments will give people the confidence once again to travel, buy cars and invest in real estate. This dramatic upward move in the stock market over the last five months will set the foundation for a stronger economy wherein people will once again resume consuming, which will broaden the financial recovery and bring forth a better economy for all Americans.

On Friday of last week, President Obama said his administration’s policies, “rescued our economy from catastrophe while building a new foundation for growth.” Sounds to me like President Obama is taking credit for the recovery. You may recall that in January, the $784 billion dollar stimulus act was passed. As of today, less than 15% of the money has even been spent and 2 million additional jobs have been lost. Yes, a lot of the money has been turned over to the states, but the actual funding of pet projects of Congress has not even begun. One should clearly argue that if the economy is already recovering, why do we need to spend money over the next two years in this gigantic waste of government money. Now would be an appropriate time to basically repeal a significant portion of the stimulus act and try to get the budget deficit under some kind of control.

I couldn’t believe my eyes when I picked up Monday’s edition of The New York Times and read economist Paul Krugman’s opinion that the government needs to approve a second stimulus bill immediately. His argument is that only bigger government can cure the economy. Krugman is the same economist who forecasted that every U.S. bank would be required to be nationalized in order to survive. He also forecasted that we would have a Depression even greater than in the 1930’s with its 25% unemployment rate. It’s even more interesting that Krugman concedes in his commentary that the economy is getting better and that the Federal Reserve and Dr. Bernanke are likely responsible for that positive action. Even his doom and gloom comrade, Dr. Roubini, has spoken of his confidence in Dr. Bernanke and the work he has done during this recession. Given how incredibly inaccurate these economists have been over the last two years, it is hard to take Krugman’s suggestion that a new stimulus package is necessary as being truly serious.

After dissecting 2nd quarter GDP data, economist Casey Mulligan noted on The New York Times blog (which is not exactly the mouthpiece of conservatives) that, “total stimulus at the state and federal levels amounted to only $12 per person.” I think anyone would have a hard time arguing that $12 per person did anything significant to stimulate the economy over the last five months.

The Wall Street Journal had an interesting editorial the other day. The expenditures of the Federal government for next year are close to $4 trillion. The government generates revenue of approximately $2 trillion, and therefore, to close the budget deficit, we would have to raise double of the revenues that the government currently receives. While tax revenues will increase in a better economy, there will never be an economy so good that it will make up such a shortfall. The Wall Street Journal pointed out that you can’t expect higher income taxpayers to make up the deficit. In fact, they pointed out that if you took 100% of the income for all taxpayers making more than $250,000, you couldn’t bridge this budget deficit. Therefore, anyone or any government that tells you otherwise is using governmental trickery.

On President Obama’s Saturday morning radio address, he said, “We must lay a new foundation for future growth and prosperity, and a key pillar of a new foundation is health insurance reform.” Such a phrase could certainly not have been uttered by an economist since it’s so clearly inaccurate. You cannot improve an economy by increasing taxes. In fact, it has been proven on numerous occasions – during the Kennedy, Reagan, and G.W. Bush Administrations – that to improve the economy, you must cut taxes, not raise them. Additionally, in order to fund this socialized medicine program, you would be adding another stumbling block for employers to hire employees. This act will do more to lose jobs in America than any legislation I’ve heard proposed as of yet.

While sitting on airplanes over the past two weeks, I had a lot of time to read a great deal regarding the proposed health care bill. Frankly, a great deal of it is totally unintelligible to the average person. However, after I was through reading virtually all the summaries I can find on the bill, I still cannot see anything in these proposals that will reduce costs and deliver better healthcare services. If President Obama is to be successful in selling this concept to Americans, he needs to emphasize what is in the bill that will make it better than the insurance most Americans are perfectly satisfied with today. All we’ve heard to this point is that very few additional people will be covered, the cost will be higher and the taxes will increase dramatically to provide less care to more people. It just doesn’t seem like this is a good deal, especially if it needs to be forced down the throats of Americans during the middle of a recession.

As amazing as it seems, no one in Congress or the Obama Administration seems to have a solution to the budget deficit. The solution is clearly not on the revenue side, but on the expenditure side. Congress has approved expenditures that will double U.S. government expenditures in only two years. If it’s true that the economy is now on the mend and positive GDP is forecasted for 2010, why on earth would we want to continue to deficit spend? The solution would be to immediately and dramatically reduce government expenditures by only spending what you are required to spend and by avoiding political funding of earmarks which add nothing to the economy and only hurts us in the long run.

We should also never forget that we live in a dangerous world. It didn’t receive very much publicity, but the U.S. military recently confirmed that two Soviet nuclear submarines were observed off the U.S. coast. The importance of a nuclear sub off of the coast of Georgia was downplayed, but it’s important that we not forget that they wouldn’t be there if they didn’t fear for their own wellbeing. In a time where we’ve elected to dramatically cut defensive budgets and spend the money on political earmarks, we should never forget that the potential for military action on our own continent is not impossible as proved by the events of September 11, 2001. There’s a fine line when the government spends money for military needs. Yes, you can sit down and talk with the enemies, but as President Teddy Roosevelt said, “Speak softly and carry a big stick.”

There was also good news last week that one of our unmanned drones shot and killed a Taliban leader and one of his wives in Pakistan. This is a clear example of how technology could control our enemies. Without the loss of one of our troop’s life, a drone flown out of Tampa, Florida was able to shoot and kill one of the most wanted men in the world.

In talking to people in Monterey and on the flights I took last week, it’s clear that the public still fears stock market investing. As has been noted here before, there continues to be an amount in cash on the sidelines equal to the full amount represented by the U.S. financial markets. However, it is quickly dropping. Every day, billions of dollars are being transferred into the bond market or the stock market. It is only a matter of time until a significant portion of this cash is invested.

The future for the financial markets continues to be outstanding. Stock markets increase before the economy. We now have hard evidence that the economy will be better next year than this year. This means that corporate profits will go up and stock prices should reflect that increased profitability. I continue to be amazed that we’ve not seen more inflows of money into investments. Now is the time to participate in that rally. With cash yielding less than one-half to 1% per year, and a market that’s up 50% in the last five months alone, it’s not too late for you to participate in future profitability.

As always, these are my thoughts, opinions and forecasts. It’s perfectly possible that I am wrong.