January Does Implementation of the Death Penalty lead to higher costs February Less Competition and Higher Hospital Costs March Millionaires Who Get Subsidies from the Affordable Care Act April The Unintended Obama Legacy
Blog Topics 2014 blog topics for 2013 are at page bottom
January Will Lake Meade become another Aral Sea February Does Taxing the rich hurt the economy March The Cause of the Great Depression April Temporary Agricultural Subsidies lead to wealthy Farmers and Higher Prices May The Presidents Stance on Gun Control leads to Increased Gun Ownership June Is there really a Gender Pay Gap July Did the Supreme Court decision in Roe v. Wade lower the crime rate August The Department of Education and wasted Money October The Financial Follies of the EPA November Social Security and Portfolio Diversification December The White House and Terrorism
The Dow rebounded from the previous day's sharp sell-off, recovering some of the 190-point loss it suffered Tuesday ( the worst trading day of the month) by advancing 120 points to close at 18,163. Tech stocks led the rally as the major indexes were up for the first time in three trading sessions and reports of a potential deal between Greece and its bailout creditors provided support to stocks as European markets soared. With an eye on the dollar and rates, traders are watching pending home sales and weekly jobless claims data Thursday for what they may say about the economy—and therefore the Fed. Martin Leclerc, chief investment officer and portfolio manager at Barrack Yard Advisors, noted that Wednesday's rebound has brought indexes closer to their previous record levels, suggesting positive momentum. "Certainly, there is a bit more volatility, but that is expected as the Federal Reserve is in the process of taking off the training wheels, and moving away from zero-rate policy," Leclerc said. "While the aggregate market is expensive, there are individual stocks that offer attractive dividend yields at much lower valuations than the S&P 500," Leclerc said. I received a number of e-mails on my last blog asking how did Obamacare increase the growth of food stamps in some states. This was a result of so called "streamlined" applications built for the healthcare overhaul are also being used for other benefit programs (welfare). In some states, the increase is a s much as 15%. The new application process isn't as stringent and doesn't take wealth (assets - liabilities) into account. As a result, approximately 632,000 people have been added to the food stamp rolls at a cost of $79 million/month. That's nearly a billion dollars/year. That's what happens when you have a lack of business experience in the public sector.
On good economic news the Dow was down 190 points; that's correct on good news. As you can probably guess, the explanation was that as a result of the improving economy, the FED will raise rates later this year as opposed to next year. My explanation is much simpler. We're in a trading range and investors were looking for an excuse to take profits at the higher end of the trading range. The good news was in the form of higher than expected business investment (purchase of capital goods and residential and business construction), higher consumer confidence and a strong dollar. What also added to the angst was in a speech Friday, Fed chair Janet Yellen suggested that a rate hike is still on the table for later this year if the economy continues to strengthen and inflation continues to tick higher and closer to the Fed's 2% mandate. The housing market continued to show signs of improvement as home prices rose faster than expected in March and new home sales in April rose 6.8%. Oil was up slightly to trade at $59/barrel and the average price of gas remained constant at $2.73/gallon. A stock that is worthy of notice is Hi-Crush-Limited-Partnership. Hi-Crush Partners LP (Hi-Crush) is a domestic producer and supplier of premium monocrystalline sand, a specialized mineral that is used as a proppant (frac sand) for the recovery rates of hydrocarbons from oil and natural gas wells. The Company’s reserves consist of Northern White sand, predominately found in Wisconsin and limited portions of the upper Midwest region of the United States. Hi-Crush produces a range of frac sand sizes for use in all major United States hale basins and is one of the few Northern White sand producers with onsite rail capacity for unit trains. The Company’s frac sand production is sold to pressure pumping service providers under long-term and take-or-pay contracts. The company has solid financials with a 9% dividend. I like this stock for a number of reasons. First, technical analysis; it has been in a 6 month trading range and is currently at it's lower end, after a steep drop today at the market open, it struggled back all day and finished at its high, both bullish signs. From a fundamental standpoint, it's drastically undervalued and has been unduly beaten down more so than the rest of the business sector. It has a PE of 8.6 when the average S&P PE is 17. This is a $40-$50 stock all day. Disclaimer: I own this stock and it is a significant percentage of my portfolio.
When Warren Buffet talks about stocks, I stop whatever I’m doing and listen. However, when he starts to pontificate about the economy, he and I rarely agree. That came to an end today. Buffet who is generally known as an advocate of liberal policies, such as increasing the tax rate on the rich and a proponent of Obamacare (good grief, makes me wonder sometime how he made his billions), was adamantly against an increase in the minimum wage, especially a $15/hour minimum wage, saying that “it would almost certainly reduce employment in a major way, crushing many workers possessing only basic skills. Instead, Buffett says, we should expand the earned income tax credit (EITC), also known as a “negative income tax,” in which the government subsidizes the wages of workers making under a certain amount. “The EITC rewards work and provides an incentive for workers to improve their skills,” Buffett writes. “Equally important, it does not distort market forces, thereby maximizing employment.” In other news: Inflation data that was released prior to the market open and remains under 2% which was expected by the street. FED chairwomen Janet Yellin in a speech t.o the Providence chamber of Commerce stated that the Fed could raise rates later this year (ruling out a June hike), if the situation warrants. This also did not rule out that rates may not be raised until next year. To recap the Friday, the Dow was down 54 points to finish the week at 18,232. Oil finished at $59.92/barrel and the dollar was stronger against the Euro with $1.10 = 1 Euro and the average price of a gallon of regular gas was $2.74/gallon, with Los Angeles, California having the highest at $3.99/gallon and South Carolina the cheapest at $2.24.
After declining 17 points on Wednesday, (Tuesday was a new high), The Dow increased 34 cents on Thursday to finish at 18,286. The positive news this week was a result of the FED releasing minutes from it's last FOMC meeting which pretty much guaranteed that here would not be an interest rate hike in June. As a matter of fact, the were a number of FOMC members who appeared to be in favor of no interest rate hikes this year. However, economic news continued to be mixed. Bell-weather Wal Mart missed on earnings yet housing starts surged in April by 120%. Home Depot beat on earnings and Lowe's missed. Today in the pre-market stocks are steady with the Dow up 5, Gold trading a little above $1200 and Oil trading above $60/barrel. Investors are watching as the top central banker in Europe -- Mario Draghi -- gives a speech in Portugal about inflation and unemployment. And Fed chair Janet Yellen is due to give a speech about inflation at 1 p.m. ET. Inflation data,will be announced at 8:30 and is expected to be tame and the market will be closed on Monday because of the holiday.
In other news, I just can't help but shake my head. The president was the commencement speaker at the US Coast Guard graduation and he stated," I am here today to say that climate change constitutes a serious threat to global security, an immediate risk to our national security". Please excuse my John McEnroe moment, "But You cant be serious". Where his priorities. Isis, North Korea and Iran come right to mind. From Fox News: Lt. Col. Allen West took on the president’s remarks this morning on “Fox and Friends,” particularly taking issue with Obama’s remarks about negligence and dereliction of duty. “We have four Americans being held hostage by Iran right now, and we’re sitting at the table talking about negotiating with them, we abandoned four Americans in Benghazi and lied about it, we abandoned a Marine in Mexico,” West said. “That’s dereliction of duty, Commander-in-Chief.”
With all the talk of interest r"ate hikes, I've received a number of e-mails concerning an explanation of what interest rates are relevant to us as consumers. The Federal Funds Rate This is the interest rate that is followed most closely and affects all other short term interest rates. It is the rate that one bank charges another bank on an overnight loan and has a direct effect on the prime rate. The current rate is .25%. Prime Rate This is the rate that the larger banks charge their best customers on short term loans (under 3 months). Once the federal funds rate is changed, the prime rate is changed by, usually, the largest bank, JP Morgan-Chase, and all other banks follow. The prime rate is generally 3% higher than the Federal Funds rate. The current prime rate is 3.25%. This affects all other short term loans: HELOC's (Home Equity Line Of Credit), boat loans, car loans, etc. What it does not affect directly is the mortgage rate.
Yield on the 10 Year Government Bond The government finances it's deficit by borrowing money and it does this by issuing bonds that have a maturity value anywhere from 30 days to 30 years. Technically, Treasury bills are issued for terms less than a year.Treasury notes are issued in terms of 2, 3, 5, and 10 years and Treasury bonds are issued in terms of 30 years. The price of a bond is inversely related to its yield and the mortgage rate is usually 2-3% higher than the 10 year yield.
After being up 55 points in the pre-market, the Dow is down 10 points 45 minutes into the trading session compliments of Wal-Mart that missed earnings. Housing starts, that were slightly better than expected has mitigated some of the downward trend. In a recent report, Goldman Sachs stated that there will be little gain and sideways trading for the market for the remainder of the year. The forecast comes as Wall Street deals with economic growth considerably slower than expected and a backdrop in which the Federal Reserve will have to weigh its desire to increase interest rates against decidedly weakening fundamentals. Goldman holds to a forecast that the Fed will hike in September, but futures market traders now assign just a 52 percent chance the central bank will tighten even in December, with just a 20 percent for a September move. The price of oil is down to under $59/barrel but is still trading sideways; gold is still sideways at $1214/ounce; the dollar is slightly stronger at $1.12 = 1 Euro and the average price of a gallon of regular gas is $2.71 compared to $3.65 a year ago.
The Dow set its first record high since March closing at 18,299, up 26 points. The market's latest lift-off is due in large part to the idea that a coming interest rate hike from the Federal Reserve will likely come later this year, coupled with companies continuing to buy back their own shares and use cash to other acquire companies, according to Quincy Krosby, market strategist at Prudential Financial. For Tuesday's markets, there is housing starts data at 8:30 a.m. ET, and a number of big retailers reporting earnings, including Wal-Mart and Home Depot before the opening bell. Mark Luschini, chief investment strategist at Janney Montgomery, also said the fact the S&P sauntered above 2,120 was a positive for the overall market. "Just given the fact the market seem's to not want to go down, I would have to say my bias is to think the market continues to grind higher," he said. (CNBC) In other news; every now and then the president does something where I'm in agreement, but more often than not, I just shake my head. The Obama administration, citing "rigorous safety standards" and a long review process, has granted conditional approval to energy giant Shell to begin oil drilling in the Arctic waters off the coast of Alaska. The Interior Department wrote in a statement that Shell could begin drilling in the Chukchi Sea once several environmental conditions are met, including a sign-off from agencies assessing the impact on endangered species. State agencies must also approve the plan. The move has upset environmental activists who are concerned the drilling will have detrimental effects. (pick an energy source and there's an upset environmentalist. So here's my question, why should he approve this, but not approve the Keystone pipeline (September 2013 blog) that would have a significantly lower threat of environmental pollution on the environment.
April Jobs Report5-8-2015 Jobs for April cam in as expected, but it appears the street was anticipating a worse number. In terms of how this would affect the FED's decision to raise interest rates, it was very much a Goldilocks (not to hot, not to cold), number. It was good enough to keep the economy going, but not to good to raise the spectre of inflation. The numbers: The economy created 223,000 in April and the unemployment rate (u-3) dropped to 5.4%, the lowest since May 2008. Job creation for March was revised downwards to 85,000 from 126,000 give more credence to the fact that the dull economy of the 1st quarter (.2% GDP growth), was a function of the harsh winter across the US. The real unemployment rate (u-6) which includes part-time and marginally attached workers (those workers who haven't looked for a job in 4 weeks), also declined to 10.8%. The actual number of marginally attached workers was 2.1 million, little changed from last month. Among the marginally attached, there were 756,000 discouraged workers, also little changed from the previous month. The unemployment rate for Asians remains lowest for ethnic groups at 4.4% (they have the highest rate of adult education at 50%) and the lowest remains blacks at 9.6% (lowest level of education at 12%), and teenage unemployment is at 17.1% (no education or experience). More good news was the average hourly earnings for all employees on private nonfarm payrolls rose by 3 cents to $24.87. Over the past 12 months, average hourly earnings have increased by 2.2 percent.
California Drought California is in the middle of a drought; it must be global warming or now the more politically correct term (spare me), climate change. In case you haven't noticed, the climate is always changing. It is in a constant state of flux. If you notice the chart above, California had a number of mega-droughts during the medieval ages and this was considerably worse than it is now. Oh yea, and probably the father of these climate alarmists were predicting an ice age in the 1960's (click on pictures below).
Obamacare Revised Costs
More on Obamacare In a recent survey by the New York FED on businesses, the median increase in healthcare premiums is expected to be 10%. More than a quarter of the manufacturing and service firms surveyed said they either have or will boost prices for goods and services "because of the effects that the ACA is having on your business." About 20 percent of respondents said they were reducing their number of workers and/or raising the share of part-time workers as a result of the ACA. His is in stark contrast to the presidents remarks earlier this year that healthcare costs are decreasing. Maybe CEO's were right when they said the president "Just doesn't get it".
Commentary on Minimum Wage
There is currently a debate in the state of NH on whether to increase the minimum wage to 8.25 from 7.25. The main argument is that it will help to alleviate poverty. That is clearly not the case. As you can see from the chart at the left, the poverty rate dropped dramatically in the 1960's. This was a function of great society legislation; specifically, increase in Social Security benefits in addition to the inception and implementation of Medicare and Medicaid. Since then, the poverty rate has fluctuated between 9-15% and is highly correlated with the unemployment rate. The vertical grey area's in the graph represent periods of recessions in the US. As can be expected, unemployment rises during recessions and peaks at the end (unemployment is said to be a lagging indicator). As you can also see from the chart, so too does the poverty rate. There is no indication whatsoever that the poverty rate is affected by increases in the minimum wage. Generally, this is quite the contrary. As can be evidenced from the below left chart, increases in minimum wage can contribute to unemployment and as we can infer from the above chart, as unemployment increases so to does poverty. If you look at NH, they have the lowest state poverty rate in the nation and it generally parallels the national unemployment rate. By raising the minimum wage, you increase business costs. As a result; businesses either pass these costs onto the consumer (in which case inflation nullifies any wage increase), substitute capital for labor, or simply go out of business. If you look at the chart below right, UAW (United Auto Workers) membership has decreased in the late 1970's from 1.5 million to 350,000 in 2009. The reason for this is simple. Detroit isn't making fewer cars, they are making more, but they have made their assembly lines more robotic and have substituted capital for labor, which became cheaper in the long run. This can also happen to those fast food workers who want a $15 minimum wage. There is currently a machine on the market that can make 300 burgers/hour. In other words, capital can be substituted for labor. Someone please e-mail me and explain how someone is better off unemployed at $8.25/hour as opposed to being gainfully employed at $7.25/hour
You cannot legislate equality. If you want to decrease poverty, implement policies to insure that higher levels of education is available to all.
The Congressional Budget Office predicted this week that more than 2 million people will leave the labor force because of Obamacare. Specifically, more people will leave the labor force or reduce their hours, to stay under the cap for federal subsidies. If you are a family of 4, and household income is under, WAIT FOR IT, $94,000, you are eligible for a federal subsidy. The number of part time/temporary workers has already increased by 35% since Obamacare was passed in 2010; and yes it will get worse, wait until 2015 when it becomes mandatory for businesses.
For a good laugh on Obamacare, go to this web site and watch this video; http://www.youtube.com/watch?v=qpa-5JdCnmo. It shows the president on 36 different occasions stating that if you like your healthcare plan you can keep it. Obviously there are 1 of two explanations for this misunderstanding. He was ill advised on the 2700 page, 4500 provision Affordable Care Act, or he knew about it and lied. According to a study by Forbes magazine, the ACA will increase premiums to men under 27 by 77%, 40 year olds, 37% and 64 year olds by 37%.
When Obamacare was 1st released, The Congressional Budget Office predicted that it would cost $900 billion over 3 years. At the time, I made a prediction to my students that I estimate the final cost would be closer to $3 trillion. Three years later, the CBO has raised it's estimate to $1.6 trillion. At this rate, we are on pace to reach the $3 trillion mark. www.healthcare.gov, the official website to sign up for Obamacare had an original cost of $100 million. That cost is now up to $292 million dollars and rising. If the government can't manage the costs on a web site, and these costs have trippled since it opened on October 1, how can it possible manage a 2700 page, 4500 provision bill. The words of Nancy Pelosi (see above) are acting as a harbinger of doom: "We have to pass the bill, so we can find out what's in it."
BLOG Topics 2013
January Do Protected Seals lead to Depleted Fish Stocks February Prohibition: Profits to Cartels & Increased Violence for Americans March Increased Minimum Wage & Extended benefits lead to Higher Unemployment April Ethanol from corn & Agflation May Cash for Clunkers lead to Higher Used Car Prices & Wasted Tax Dollars June The Affordable Care Act; Anything but Affordable Part 1 July The Affordable Care Act; The poster Child for False Advertising August Detroit: Higher Taxes + Liberal Benefits = Bankruptcy September No Keystone Pipeline leads to more pollution October Global Warming! Or is it Global Cooling! November Poverty & Benefits December Does Affirmative Action lead to Reverse Discrimination?
The United States has amongst the lowest savings rate for all technological nations. The iOMe challenge is a nationwide competition between Colleges where teams submit a 10,000 page essay on how Americans can improve their savings rates. In addition, teams must produce an approximate 60 second video which complements the essay. If you click on the iOMe logo above, it will take you to Bentley University's 2012 video submission. The faculty adviser for the challenge is John Tommasi and is offered during his Fall EC 351 course, Contemporary Issues in Economics. I'm pleased to announce that on February 15, Bentley was declared the winner of the iOMe video portion of the contest. Congrats to the team members and great job!
EC 3900 Energy Economics
EC 3900, Energy Economics and International Markets, is a 3 credit, Short Term Program, that is offered during Spring semester. After 7 weeks of lecture, the class takes a 10 day educational/cultural tour to France where 80% of their electricity is produced by nuclear power. During the 10 day trip, students travel to, and tour various nuclear facilities Last year's class visited; Marsailles, Aix en Provance, Lyons, Brest and 4 days in Paris.
If there were ever words that can strike fear into the hearts of any man women or child, it's: "I'm from the Government and I'm here to help". On a monthly basis my blog, from an economic standpoint, will explore government laws, decisions and actions, which while well intentioned, had inadvertent results that were either disastrous, or made a bad situation worse. It wouldn't surprise me if you reached the conclusion that congress does two things well, nothing and overreact; and you may ask yourself, do Congressional members vote for what is best for the economy, or what will get them re-elected.