Tuesday, August 31, 2010

"Jobs may be at Risk, But Protectionism is Riskier"

Sydney M. Williams

Thought of the Day
“Jobs may be at Risk, But Protectionism is Riskier”
August 31, 2010

The good news is that by 2008 exports over the previous fifty years, as a percent of GDP, rose from just over 5% to 12.1% in 2008. The bad news is that imports, over the same period increased from just under 5% to 17.2%. During the recession (current, just ending, or starting over?) both numbers fell, but exports fell more than imports, so that June’s trade gap, reported last week, was the highest in two years.

A widening trade gap has devastating effects on GDP, as exports are added and imports subtracted. According to Mark Trumbull, writing in the Christian Science Monitor: “Without the import boom, GDP would have been 4.45% higher in the quarter.” A focus on exports should be critical. Overall, exports declined 1.3% in June to $150.5 billion, the biggest month-to-month decline since April 2009, led by categories such as capital goods, materials, food and beverages. However, U.S. automotive exports were the highest since October 2008 – lending proof to the concept that we can manufacture things people want.

Trade, however, is a complicated issue. To the extent that foreign businesses compete with domestic producers, there will always be issues of “fairness”. When union workers are involved the issue becomes even touchier, especially for Democrats who are beneficiaries of their enormous cash contributions. Whenever we trade with a mercantilist state (such as China), it can always be assumed that subsidies play a role; however, they also do in our country through tax credits and incentives. Virtually all interest groups with an agenda, such as “Green’s”, union representatives or xenophobes, get involved, pressuring politicians to further their own narrow interests. For example, it is expected that today the U.S. Commerce Department will find that $550 million of imported aluminum from China was illegally subsidized by the Chinese government, possibly leading to higher import duties.

Exports of goods and services doubled in the 1990s and grew from $1 trillion in 2003 to $1.8 trillion in 2008. Highlighting the importance of free trade, according to data from the U.S. International Trade Commission, U.S. exports to eighteen Free-Trade Agreement countries grew at 8.6% from 2007 to 2008, a time when U.S. GDP expanded 2.6%. This has not gone unnoticed by the administration. In a March 10th speech at the Export-Import Bank conference, President Obama vowed to double exports over the next five years. He should be more ambitious. With more than a billion people entering the middle classes in places like China, Indonesia, Vietnam, India and Brazil, the opportunity for exports over the next several years is extraordinary.

Trade has always drawn strong supporters and equally vociferous opponents. The pros and cons for free trade can be distilled to pretty simple terms. Supporters point out that trade is essential for long term growth; they mention NAFTA which has created an estimated 20 million jobs world-wide. Opponents argue that lower costs, including living standards, have driven jobs overseas.

The global reach of the internet, though, is not to be denied. Microsoft estimated two years ago that there were 182 million websites around the world, doubling every couple of years, providing easy access for consumers in all corners of the globe. The logical conclusion is that free trade is happening and we are better off embracing it than opposing it. Advocates of free trade, however, must recognize that concomitant to trade agreements must be an emphasis on training for those whose jobs are being exported. Robert Barro, in yesterday’s Wall Street Journal, in a compelling op-ed “The Folly of Subsidizing Unemployment”, criticized the almost four-fold extension of unemployment benefits (26 weeks to 99), arguing that that decision “almost surely” caused the share of long-term unemployment to reach 46.2% versus an average of 25% in post-Word War II recessions. The money would be better spent in training.

Nevertheless, it is disappointing that the President and Senate Democrats have not more aggressively pushed to complete pending free-trade agreements with Panama, South Korea and Colombia. Negotiations are also in progress with Malaysia, Thailand, the United Arab Emirates and SACU (the Southern Union African Customs Union). Those negotiations should be fast-tracked.

A disturbing cloud of doubt, creating unnecessary uncertainty, hovers over the question of free trade, though. Perceiving themselves as protectors of domestic jobs, unions remain the most obdurate obstacle to the furtherance of free trade. They are strong supporters of Democrats. According to the American Institute for Economic Research, 92% of the $667 million given by unions to political campaigns between 1990 and 2008 have gone to Democrats, creating sycophants of their beneficence. Mr. Obama, as would be expected, has acquiesced to many union demands. During negotiations with General Motors, in early 2009, he chose to subsume the rights of bond holders to the demands of union members. And, as Thomas Cooley and Lee Ohanian wrote in Friday’s Wall Street Journal, “Like FDR, Mr. Obama has advanced unionization through his recess appointments to the NLRB and his support for ‘card check’”.

Facing anemic economic growth, exports should be (and hopefully will be) our “ace-in-the-hole”. Germany is an example of a developed nation whose actions should be studied and emulated. The country induced austerity measures, including a reduction in unemployment benefits, and a focus on exports. Germany has performed what Larry Summers refers to as “escape velocity”, ratcheting out of recession, while recognizing that part of the cure involves pain, but the important thing is to get well.

Trade is an emotional issue, fraught with risk. Countries’ attitudes can easily slip into “beggar-thy-neighbor” policies, especially during recessions. The high-water mark for protectionism in the United States in the 20th century occurred in 1930. While the Smoot-Hawley Tariff Act, signed in June of that year by President Hoover, may not have caused the Depression, it certainly prolonged it. U.S. exports to Europe declined from $2.341 billion in 1929 to $0.784 billion in 1932 – a 67% drop. It is highly unlikely that anything similar will be implemented today, but we need to be ever watchful.

Monday, August 30, 2010

"In Economics, Stubborn Adherence May Ignore Pragmatic Approaches"

Sydney M. Williams

Thought of the Day
“In Economics, Stubborn Adherence May Ignore Pragmatic Approaches”
August 30, 2010

The downswing in the economy, manifested by Friday’s downward revision in Second Quarter GDP from 2.4% to 1.6%, has created an upswing in interest in the Austrian School of Economics. Frederick Hayek’s 1944 The Road to Serfdom became Amazon’s top seller for June of this year. It has been the failure of a Keynesian induced $800 billion stimulus bill to generate jobs, grow the economy more sharply and to build confidence that has created this renewed enthusiasm for what might be termed anti-government policies. Treasury Secretary Timothy Geithner’s “summer of recovery” looks increasingly wistful as we stumble toward Labor Day.

Professor Peter S. Boettke of George Mason University, an adherent of the Austrian School, was profiled in Saturday’s Wall Street Journal. Professor Boettke’s thesis includes a belief that all central planning, including that of the central bank, damages markets and, therefore, the economy. The role of the Federal Reserve, he is quoted as saying, is to “make money as neutral as possible, which never favors one party over the other. That means sometimes prices fall.” Persistent low interest rates, adherents of the Austrian School believe, were one of the leading causes of asset price inflation, which we all saw in spades in the housing industry in the late 00s. Prices which run up too fast – and are not due to shortages or permanently higher demand – almost always collapse; they revert to a mean.

One could argue, in fact, that the Tea Party movement, begun a year ago, and last weekend’s “Restoring Honor” rally in Washington are visceral companions to the intellectual arguments laid out by Hayek’s successors. No matter one’s personal feeling about Glen Beck, the 300,000 to 500,000 people who gathered in Washington on Saturday was a vivid reminder of the disconnect people feel with those in Washington who supposedly represent them.

Speaking in defense of his policies, Fed Chairman Ben Bernanke said he was prepared to take even bolder steps to bolster economic growth, suggesting that “policy options are available to provide additional stimulus.” Saturday’s Wall Street Journal mentioned four options available to the Fed.:

A) Resume the program of long term securities purchase.
B) Lower the interest rate banks receive for reserves they keep with the Fed.
C) Invoke a verbal promise to keep rates low for a longer period than now expected.
D) Raise the Fed’s inflation target to more than 2%.

Despite the assertion by Mr. Bernanke that there is more that the Fed can do, the administration is faced with the fact that monetary policy is beginning to resemble the futility of pushing on a string. At the same time fiscal policies, at least government’s spending programs, appear to be subject to the same law of physics. The 2010 Federal budget, as a percent of GDP, is expected to reach 24.6%, the highest level since World War II, and one that compares to 17.8% in 1960, 21.7% in 1980 and 18.4% in 2000. The only result, thus far, is that confidence is low and uncertainty is high.

Consumers, the traditional engines of economic growth, are of necessity retrenching. Governments, both federal and state, have bloated deficits making traditional stimulus more difficult. Corporations, virtually alone, are in good financial shape, but currently lack the confidence necessary to spend on growth, hire additional labor and propel the economy. (Professor Robert Shiller’s urging, as expressed in Sunday’s New York Times, that the federal government should increase their deficit by raising revenues for states makes little sense to me.) One cannot solve a problem unless one addresses the cause, and the principal cause of state’s plight is due to unreasonable demands on the part of their unionized employees. Recognizing the pain that such reductions would cause, encouraging such profligacy makes little sense. Recessions, by definition, mean hardships. The important thing is to implement strategies that assure renewed long-term economic growth.

As we head toward the mid-term elections, now 64 days away, the position of Democrats appears shaky. But with two months to go the race has not been won, or lost. We can expect President Obama to seize control of the debate over the economy, not continuing to let the economy dictate terms. It would not be surprising for him to tack toward the center, encouraging corporate investment and hiring – perhaps through tax credits or encouraging the reduction in the corporate tax rate. It is also possible he may preempt a Republican proposal for temporarily extending the Bush tax cuts for all categories. Stimulus, in economic terms, is spending and spending can be done by the private sector, as well as the public and, I would argue, more effectively.

A problem with economics is that professionals find themselves ensconced in one school or another, with little ability or desire to migrate. Pragmatic approaches, which might encompass a combination of Keynes, Hayek or simply mathematical modeling, too often get ignored. Each “school” claims to have the one answer. Common sense gets sidelined, and the losers are the people.

Thursday, August 26, 2010

"Uncertainty Breeds a Lack of Confidence"

Sydney M. Williams
Thought of the Day
“Uncertainty Breeds a Lack of Confidence”

August 26, 2010

As we approach the end of August and face the dreaded months of September and October, we are reminded of Mark Twain’s famous quote: “October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” With no disrespect to the memory of Samuel Clemens, September, I believe, has actually proven to be the single worst month for the averages. We are nearing that month with the economy looking weak, confidence low, and with market bears, perhaps alone among Americans, feeling good.

This will be my 44th September working on Wall Street; during those years September has more often been down than up, but not so consistently that one can derive any certainty as to the outcome of this year’s September. Using the S&P 500 as a proxy, on 23 occasions the month closed lower, on 19 it was up and once, 1979, it closed exactly flat at 109.32.

But, more important than the history of prior difficult Septembers, and what they may portend for the future, is the absence of confidence – a subject I have broached before. Early in his first inaugural address in 1933, President Roosevelt said: “So, first of all let me assert my firm belief that the only thing we have to fear is fear itself – nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.” Our country, our economy, our markets are suffering from a lack of confidence.

A curious thing about confidence is that it is not necessarily contagious. President Obama exudes self confidence, yet has been unable to instill a similar sense in the people. There is no question that, as a nation, we have experienced an extraordinary shock. Stocks have been in the doldrums for most of the past ten years. Home prices, which had risen almost uninterrupted for sixty years, collapsed over the past four and a half years destroying most peoples’ single largest nest egg. Financial institutions, using other peoples’ money and assuming unnecessary risk and undue leverage, brought the banking system to its knees. Politicians have increasingly become distanced from those they purportedly represent. (The fact that a recent Rasmussen poll indicated that 68% of politicians in Washington support the decision to erect a mosque two blocks from the World Trade Center site, while 77% of the people express disapproval is a telling and disturbing finding.) As Roosevelt also said in the same speech, at a time when the country was in far worse straits than it is today, but a comment that is still appropriate: “Only a foolish optimist can deny the dark realities of the moment.”

In 1980, the U.S. also faced severe, though different, economic problems. As newly elected President Reagan proclaimed in his inaugural, we “…are confronted with an economic affliction of great proportions. We suffer from the longest and one of the worst sustained inflations in our nation’s history.” President Reagan’s response was different from Roosevelt. In that same speech Mr. Reagan said: “In this present crisis, government is not the solution to our problem.” In circumstances not unlike today, Reagan’s initial efforts did not bring him great approval. A year and a half into his first term his approval ratings bottomed at 35%, well below where President Obama’s are today. Yet, by the end of his second term, with interest rates and inflation down dramatically, GDP up 83% and the S&P 500 higher by 105%, his approval ratings were above 60%.

The U.S. workforce approximates 180 million people. If one subtracts the unemployed (about 18 million) and the roughly 10 million who work directly for the government, you have close to 150 million who are working in the private sector. Of those, perhaps 10 to 15 million work for businesses that contract directly with the government. That leaves about 140 million who work in businesses in which the owners or managers depend on a view of the future that gives them confidence to grow and expand. They rely on the availability of credit, and rules and regulations that are fair and understandable. As businesses grow they hire and pay more in taxes. Everyone benefits. But deplorable employment numbers, the sorry state of home sales, the unwillingness of banks to extend lending, and declining stock prices tell us that confidence within the private sector is AWOL.

Every action has a reaction and a consequence. The decision by the Federal Reserve to keep interest rates low and to purchase longer dated Treasuries has not encouraged lending, but it has cost savers. The debt of the federal government is about $13 trillion. If the Fed’s actions have reduced interest rates across the spectrum of maturities by 200 basis points it means buyers of Treasuries have foregone $260 billion in income – an unsung sacrifice and unmentioned stimulus. Obviously monetary policy is a powerful tool and I am way over my head, but I worry that the Fed, in keeping interest rates as low as they have for as long as they have, has done very little for confidence. Additionally, a healthcare bill in excess of 2000 pages so complex that no one appears to understand its full ramifications does not help the employer looking to expand and hire new people.

The sad thing is that this is happening just as an extraordinary opportunity is developing – the emergence of hundreds of millions of consumers. China, Russia, India, Brazil and Indonesia collectively consist of more than three billion people; ten to twenty percent of them, over the next couple of decades, will be entering the middle classes. They will become consumers of products and services we produce. President Obama has said he wants exports to double over the next five years. He should set the bar even higher. America, since the end of World War II has been the engine, via our consumers, of global growth. That is changing. The engine has moved to the East. Manufacturing represents only 12% of our GDP, but it is worth remembering that our manufacturing, as a stand alone economy, would be the 8th or 9th largest in the world as measured by GDP. We should also keep in mind that Japan and Germany manufacture cars in this country – a vote of confidence by others in the potential of our workers and resources. Besides visiting a government funded battery plant in Wisconsin, the President should also visit the Chattanooga, TN site for Volkswagen’s new factory.

Early in his inaugural, before he spoke of “remaking America”, President Obama said that our past successes were due to “the risk takers, the doers, the makers of things.” That is the spirit and the message he needs to convey. Government should write regulations, enact laws, set the rules and serve as umpire. But, as long as they play by the rules, government should not interfere with the players.

So I conclude that the seemingly impossible is possible – that the most important mission for the President, Congress and the Federal Reserve is to work to restore the confidence necessary for business to build for the future. The economy will improve and so will the markets.

Wednesday, August 25, 2010

"Technology - A Blessing and a Curse"

Sydney M. Williams

Thought of the Day
“Technology – A Blessing and a Curse”
August 25, 2010

Attention deficit disorder has never impeded success on a Wall Street trading desk. So, when the New York Times reported, as they recently did, that “scientists say juggling e-mail, phone calls and other incoming information can change how people think and behave,” it should not alter the behavior of your favorite broker. The piece in the Times goes on: “Heavy multitaskers actually have more trouble focusing and shutting out irrelevant information, scientists say, and they experience more stress.” Most Wall Street traders that I know claim to thrive on stress and claim to be experts at ignoring irrelevant information. Stress affects us all. As to ignoring irrelevant information, some can; more of us cannot.

Information has never been so abundant and so readily available. Cell phones and BlackBerrys’ are often in hand; I-Pods dangle from ears, and I-Pads have become a necessary adjunct to hand bags and briefcases. More and more coffee shops and stores are Wi-Fi compliant. The internet is seconds away and virtually any question can be answered in moments. Twittering has replaced conversation and is considered better because one can skip from friend to friend without insulting the one or ignoring the other.

This enormous social revolution has occurred within a few short years. My sister who died only thirteen years ago would barely recognize the world her grandchildren accept as normal. The best historical comparables I can think of would be in 1450 when Johannes Gutenberg invented the printing press, and the 1830s when the locomotive (1831), the telegraph (1838) and photography (1839) transformed America.

Just as the industrial revolution in the first half of the 19th century altered lives in a manner unrecognizable to those born a generation earlier and disrupted lives that had become comfortable in old, tried and proven ways, so this revolution is changing lives – outdating jobs that are no longer relevant, but at the same opening vistas and new opportunities that were beyond the ability to conceive a few short years ago. Society has a responsibility to help people adjust, but there is no going back and roadblocks to innovation will only hurt us all in a globally competitive environment.

Peggy Noonan had a wonderful article in the weekend edition of the Wall Street Journal on the subject of information overload. We are, as she wrote, “part of a crowd,” all connected, yet we are also alone, “heads down, shoulders slumped, checking…e-mail and text messages.” In a perversion of normality, the pervasiveness of today’s communication technology means we are connected to those at a distance, but disconnected from those immediately around us. Ms. Noonan agrees with William Powers, the author of Hamlet’s BlackBerry who doesn’t dismiss the importance of being “connected”, but worries that its ubiquitous nature risks altering our lives for the worse. Mr. Powers and his wife, both writers, live on Cape Cod and rely on the internet. He deplores the rude intrusion of e-mail, text messages and IM. He writes, “But as we connect more and more they’re changing the nature of everyday life, making it more frantic and rushed.”

L. Gordon Crovitz had an equally fascinating column in Monday’s Wall Street Journal in which he discusses both the negative and positive aspects of the new technology. Using “the web”, he writes, “promotes personalization that can become fragmentation…and enables the wisdom of crowds that can result in the stupidity of the lowest common denominator.” On the other hand, he quotes Clay Shirkey, an NYU professor who makes the observation: “people spend so much leisure time being passively entertained by television that even a modest redirection into social media can be important.”

The demanding nature of cell phones, instant messaging and twittering can also prove fatal. As far back as 2002, the Harvard Center for Risk Management estimated that 2600 people were killed as a result of using cell phones while driving and that 330,000 were injured. Distracted drivers are estimated to have killed 6000 people in 2008. It is also estimated that 50% of all drivers between the ages of 18 and 24 are texting while driving – an appalling statistic.

Nevertheless, the Web and easy access to it are here to stay. Entertainment, communication, education, news services, books and the securities industry are all being revolutionized by these products, and new uses and industries will develop. Like other revolutionary periods, the birthing process is labored and uneven, but ultimately society should benefit.

A risk, in my opinion, is that the proliferation of so much information, made easier to access via increasingly sophisticated search engines, may well cause people to simply read or view that which fortifies one’s preconceived notions. While the internet makes it possible to broaden one’s horizons, the limits of time and the inundation of material may make that less likely.

William Powers writes that he and his wife take two day “sabbaticals” every week from the grasping tentacles of e-mail and texting and find that by being “disconnected” they in fact reconnect as a family. Peggy Noonan ends her column with sage advice. “Step back, or aside. Think what you think, not what they think. Everyone is trying to push. Don’t be pushed.”

The Net and access to it are only going to expand and get faster. It will speed up commerce and increase efficiencies. It can be used to increase one’s knowledge and broaden one’s vistas, or it can become a vehicle for polarization. Noonan and Powers are right. We must embrace the change it brings, but recognize that time away provides perspective, a commodity increasingly in short supply in this high speed world we inhabit.

Tuesday, August 24, 2010

"Boomers Preparing to retire - Bond Funds Attracting Dollars. Is There a Connection?"

Sydney M. Williams
Thought of the Day
“Boomers Preparing to Retire – Bond Funds Attracting Dollars.
Is There a Connection?”
August 24, 2010

On January 1, 2011, the first of an estimated 77 million baby boomers will reach the age of 65, putting further pressure on already stretched retirement systems. During those birthing years for boomers, 1946-1964, the population of the United States increased from 141 million to 192 million, up 36%. (In comparison, over the nineteen years ending 2010 the population of the U.S. rose 23% to 309 million.) The authors of the Coming Generation Storm by Laurence J. Kotlikoff and Scott Burns write, “The portion of the population age 65 and over will nearly double over the next 30 years.”

Yesterday Bloomberg reported that investors over the past two years have “poured” $480 billion into fixed income mutual funds, a number that compares to the $497 billion that investors put into equity funds in 1999-2000, as stock markets were cresting. (In contrast to bond funds, investors have pulled $232 billion from equity funds over the past eighteen months.) What makes the bond inflows even more staggering is that aggregate bond mutual funds, ex money market funds, are about half the size of all equity funds. The pertinent question arises – given aging boomers and a rush to bond funds – are the two statistics related?

There is, of course, the natural tendency for aging investors to worry more about the return of their money than the return on their money. That line of thinking suggests that boomers, in their forties and fifties, were willing to speculate, but upon reaching their fifties and sixties became, naturally, more concerned about safety. That, perhaps, is the explanation.

On the other hand, the money flows may simply indicate the well-known lemming-like behavior of investors. Stock investors have fared poorly over the past decade and, as we all know, extrapolating the recent past is a common behavioral response. Between January 1, 1999 and December 31, 2000 when half a trillion dollars was invested in stocks the S&P 500 traded between 1229.23 and 1517.68. If the money had been invested at the average of those two prices, fund holders would have lost 23%, or $114 billion. This fact should give pause to bond investors and suggests some skepticism is warranted. Whether a “bubble” has developed I don’t pretend to know, but certainly there seems to be an element of complacency as to interest rates.

Structural aging demographics are a reality. State and local pension funds are underfunded. Social Security is expected to be drawing down assets in the next four or five years. Investors have seriously underfunded their own 401K and IRA plans and defined benefit plans are largely features of the past. The fact is there is not enough money. Economic growth is projected to be anemic and what growth there is will likely be led by exports, and the administration has still not signed two pending free trade agreements. Consumers are sensibly repairing their balance sheets and, while the savings rate has risen from 2% at the end of 2008 to 6.4% and the average credit score, as published by Equifax, is 704, the highest since 1998, that trend is likely to persist.

Aggravating the situation has been a leadership in Congress that seems oblivious to the on-coming problem. Social Security reform has been kicked down the road by members of both parties for years. The one President who attempted reform, George W, Bush, was vilified for his efforts. In retrospect, his recommendations and their timing would not have been auspicious, but they didn’t even get a debate. Congress is a body that responds to crises and has little interest, or ability, to anticipate events. Nevertheless, in three to four years Social Security will begin paying out more than it takes in. Besides denuding the agency of funds, it will have the effect of removing a natural buyer of U.S. Treasuries, not a positive for the direction of interest rates.

There are changes, reasonably simple ones that could be adopted. The age for receiving Social Security has been gradually increasing. That trend could be accelerated. Life expectancy has risen dramatically since Social Security was introduced in 1935, but that is primarily due to a sharp decline in child deaths. Life expectancy for a man who reaches 65 today is only three years longer than the man who reached 65 in 1935. The bigger problem is that the number of workers for every recipient has declined from 16 in 1950 to 3.3 in 2005. Other changes that would not be terribly disruptive would be to raise the annual earnings on which the FICA tax is assessed and employing some form of a means test. Liberalizing immigration policy for college and university graduates would attract a greater number of productive, young workers.

But I suspect the answer to the question in the title of this piece is no, there is not a connection between the flight to bonds and aging boomers. There may well be (and there should be) a greater desire for security as one ages; however, locking money up at two, three or four percent for twenty years does not necessarily assure security. Two percent inflation will reduce the purchasing price of the dollar by thirty percent over twenty years. And, despite all the noise about deflation, the CPI has risen three percent for the past twelve months. The race to bonds (and the dash from stocks) has been hastened by the sense, as Richard Thaler has put it, that “things feel more uncertain after bad times.”

Sadly, I suspect the dollars flowing to bonds does not reflect the considered and thoughtful decision making of soon-to-be-retired boomers, but rather the hype and antics of a crowd, trends that historically end badly.

Monday, August 23, 2010

"The New Jersey Pension Scandal - A Canary in the Coal Mine for Munis?"

Sydney M. Williams

Thought of the Day
“The New Jersey Pension Scandal – A Canary in the Coal Mine for Munis?”
August 23, 2010

Should a fiduciary deliberately falsify the value of the assets for which he or she is responsible, the act would land them in jail, or at least subject them to a heavy fine. And that’s the way it should be. But, not so if you are a member of the legislature, the Treasurer or Governor of the State of New Jersey.

Last week the S.E.C. issued a cease-and-desist order against the State, its first securities fraud case ever against a state. New Jersey authorities settled the case without admitting or denying wrong doing. However, the S.E.C.’s findings against New Jersey would have landed individuals working in the private sector in jail.

The root of the problem, disclosed in the release last week in a cease-and-desist order from the S.E.C. against the State of New Jersey, is laid out in the “Summary”, paragraph 17. “On June 29, 2001, the State legislature approved legislation (P.L. 2001, c. 133) that, effective November 1, 2001, increased retirement benefits for employees and retirees enrolled in TPAF (Teachers’ Pension and Annuity Fund) and PERS (Public Employees Retirement System) by 9.09%. In order to fund the enhanced benefits, without increased costs to the State or taxpayers, the legislation revalued their TPAF and PERS assets to reflect their full value as of, June 30, 1999, near the height of the bull market. Bond offering documents did not disclose the retroactive mark-to-market revaluation of the pension assets under the 2001 legislation until March 2003, or the reason for the revaluation. More specifically, bond offering documents did not disclose that the State used the market value as of June 30, 1999 in order to make it appear that the State could afford the benefit improvements.” The difference, according to the S.E.C. filing, was $2.4 billion – not chump change in the world of fraud, even on Wall Street!

Pointing to the fact that at least fraud is bipartisan in New Jersey, Mary Williams Walsh (whose article entitled “N.J. Pension Fund Endangered by Diverted Billions” in the April 4, 2007 issue of the New York Times appears to have initiated, or hastened, the S.E.C. investigation) wrote last Wednesday in the same paper: “The misstatements began during the Republican administration of Donald T. DiFrancesco and continued under Democratic administrations, including those of James MeGreevey and Jon Corzine.” This cavalier attitude of protecting their own and the hell with the public explains a finding by Scott Rasmussen, as quoted by him in an interview in the weekend edition of the Wall Street Journal: “The major division in this country is no longer between parties but between political elites and the people.”

The amount of bonds sold by the State of New Jersey during the period covered, 2001-2007, amounted to $26 billion in 79 offerings. Since, in the settlement, New Jersey neither admitted nor denied wrongdoing, but simply said they wouldn’t do it again, one could perhaps excuse the comment from an official of the New Jersey state Treasurer’s office, as reported in Thursday’s Wall Street Journal. “No investors appeared to have been harmed. ‘New Jersey has never failed to pay a bond holder and never will’, said Andrew Pratt…The state ‘aims to have the best bond disclosure in the nation and will continue to strive to achieve that goal,’ he said.” And, up until early December 2008, an employee of Bernie Madoff’s could have said the same thing!

The take-away from this case is multifold. First, the municipal bond market, at about $3.0 trillion is roughly the size of the corporate bond market; however, the S.E.C. cannot require governments to disclose anything; they can only prosecute them after the fact. The enormous underfunding of the retirement and healthcare plans for unionized public employees (estimated at close to $3 trillion, according to a recent survey from Northwestern University), combined with the dire financial straits in which States find themselves in present a combustible combination. Second, New Jersey’s plight showcases the absurd actuarial assumptions, regarding expected returns, that are being made by all public (and most private) pension and retirement plans; most assumptions fall in the 7.5%-8.0% range. In a world in which the yield on the Thirty-Year Treasury is 3.7%, using estimated returns more than double the long term Treasury yield is akin to giving Mr. Madoff your money after he was convicted. Third, the case reflects the growing view of people that politicians are a class apart, that they are immune from liability and responsibility. And fourth, the suit is a manifestation of the power of public employees’ unions; their concern is solely to their members, to the politicians who assure their jobs and to a grab for power on the part of union bosses; costs to society be damned.

In Friday’s New York Times, an article on New Jersey’s crisis noted that Governor Chris Christie has signed legislation that will curb benefits for new employees, “but the effects of that will not be seen for many years.” In the same article, the Time’s quotes Dr. James Hughes of Rutgers, “We’ve dug ourselves such a deep hole over so many years that I don’t see a way out.” Nevertheless, at least Governor Christie is moving in the right direction. This is a problem that is not going away. As Steve Malanga writes in an op-ed in today’s Wall Street Journal, New York, California, Illinois and Rhode Island are in the same boat.

Despite the ominous conclusions one can draw from the S.E.C. suit against New Jersey, thus far municipal bond holders appear complacent. Will this sense of complaisance be warranted? I don’t know, but I’m skeptical. There is too much money, promised to a few, guaranteed by a select group of politicians, but ultimately the responsibility of all taxpayers.

Thursday, August 19, 2010

"This is No Time to be Too Bearish"

Sydney M. Williams

Thought of the Day
“This is No Time to be Too Bearish”
August 19, 2010

While there are many factors that give cause for concern, from deteriorating cultural trends to the uncertain path of the economy, one should not lose sight of the fact that markets march to their own drummer.

It is the cultural trends that provide the most reason for pause. Recessions are cyclical. They are a natural, if unfortunate, aspect of capitalism. Changes in cultural attitudes, in contrast, are more apt to be secular – longer lasting and more difficult to redress. The trends that are of concern include an increasing dependency on government, fomenting a growing sense of entitlement; college youths who seem reluctant to challenge their “liberal”, but discriminating, professors; a tendency on the part of both political parties to compartmentalize the electorate, in a divide to conquer mode, and an approach toward immigration that favors illegals over the educated and talented.

The economic problems facing the U.S. and the rest of the world have been discussed, ingested and regurgitated ad nauseum – unemployment, deficits, housing, implications of healthcare reform, unfunded liabilities for public pension funds and taxes. Additionally, as was recently mentioned to me, the trend in demographics works as an inhibitor to growth. Retiring baby boomers, the engine of growth over the past two or three decades, will emphasize savings as opposed to consumption, not a bad thing, but, nevertheless, a drag on the economy.

The news, as we all know, continues to be dismal, but is also well known and well publicized. It brings to mind the Cyrano Principle of Laszlo Birinyi, of Birinyi Associates and with whom I worked for ten years at Salomon Brothers in the 1980s. The principle states: “If the concerns of the market are as obvious as the nose on your face, the market and monetary policy makers will have an amazing ability to adapt and adjust.”

The environment in which we find ourselves is one that puts very high values on Treasuries, with the Ten-Year at 2.6% and on Investment Grade Corporates, with the FINRA-Bloomberg yield at 4.3%, and relatively low values on many large-cap stocks, with the yield on several exceeding that of their bonds. Ten years of poor equity performance have soured investors on the concept of long term investing. That is manifested in continued net outflows from domestic equity mutual funds and large inflows into bond funds. It was interesting, therefore, in response to a question, to look at the performance of stocks in the third year of a Presidential cycle. Going back to 1947, there was only one year in which the S&P 500 was not up and that was 1947 when the S&P 500 closed exactly flat. (The DJIA in that year, however, was higher.) However, the exercise demonstrated the value of patience and looking out over many years when investing. During those sixty-three years the S&P 500 has risen by 72 fold – 15.30 to 1094.16, a CAGR of 7.01%.

Those years covered a time of exceptional growth in the United States and I would suggest that future growth will likely be far more modest. Nevertheless, there are few asset classes that can match the returns of stocks over very long periods, and we must remember that today we have the advantage of ten years of flat to down performance to our rear. Timing, as the old adage goes, is everything and I acknowledge that I have no ability or advice in that regard, other than to invest gradually.

The past is never prelude to the future and the cultural forces we face are formidable indeed. Regardless, I suspect, like the late 1930s or the late 1970s, stocks are in the process of a long term adjustment. It seems likely stocks will remain in a trading range for the next few years, but I suspect along a rising grid, unlike the downward slope of the past decade.

Wednesday, August 18, 2010

"The Eonomic Quagmire - A Commonsensical Recommendation"

Sydney M. Williams

Thought of the Day
“The Economic Quagmire – A Commonsensical Recommendation”
August 18, 2010

Joseph Schumpeter first used the term “creative destruction” in 1942, in his book Capitalism, Socialism and Democracy. The concept is that capitalism expands as new businesses replace old ones, allowing for a continuous process of innovation, thereby providing economic growth and improving living standards. Yesterday a friend sent me a piece by Gordon Long, who authors “Tipping Points”, entitled “Innovation, What made America great is now killing her.” It can be accessed through the following link: http: //www.safehaven.com/print/17818/what-made-america-great-is-now-killing-her. The title, admittedly dramatic, refers to the fact that other countries, especially China, have learned the lessons of “innovate and adapt” just as we appear to be moving in the opposite direction.

His message is worth considering. The point is that America prospered because of her creative abilities and her willingness to adapt to the changes resulting from the destruction of the old industries and technologies. It is a harsh world in that some fail, but more succeed and society benefits. He writes that we are falling behind the rest of the world, especially the emerging segment, both in terms of innovation and adaption. He points out that in 1997 the U.S. created 33.4 million new jobs and obsolesced 30.4 million, for a net addition of 3 million new jobs. In 2009, new job creation amounted to 24.7 million, but 33.4 million jobs were eliminated – a net loss of 8.7 million jobs.

What caused this change? Mr. Long suggests a number of possibilities, including a failure in education, particularly in the sciences, which has been inadequate and the government’s emphasis on fairness of outcomes, rather than opportunities. R&D spending has not kept pace with GDP growth. U.S. GDP growth has compounded at about 5.6% over the past thirty years, while the R&D spending of private industry has compounded at 4.5%. (When one includes government R&D spending the total numbers are even lower.) In terms of the distribution of the world’s researchers, as Mr. Long points out, the United States’ share has declined from 23.2% over the past five years to 20.2%, while China’s share has risen from 14% to 20.1%. According to the National Academies, the number of graduating engineers in 2005 in the U.S. was 70,000. In the same year China graduated 600,000 and India, 350,000.

As America abandoned the habits that made us strong and competitive, China and much of the emerging world have picked them up.

Gordon Long points out that our principal strength (and which is now at risk) is “Intellectual Capital” – “the knowledge of knowing how to do something. How to design and build something – not the actual ‘doing it’”. As he writes, “the costs of manufactured products today are less and less in labor and production and increasingly in materials and innovation.” It is an arena in which we should be competitive, but it is one in which we are abrogating our advantage.

Mr. Long suggests ten “starting points” for change, some of which may be only peripherally relevant, but nevertheless are worthy of consideration – that government employees earn 30% to 40% more than their private sector counterparts and that we use money we can ill afford to fund military operations in 130 countries. He points out that the $165 billion we spent bailing out AIG would have paid for four years of college for 750,000 young adults. He indicates that S&P 500 companies “paid almost net zero taxes, reduced U.S. hiring, yet received the bulk of the government bailouts”. At the same time the government has done little for small business “other than burden them with ObamaCare and the potential removal of the Bush tax cuts.”

Thomas Sowell, in Dismantling America, attributes America’s problems to a failure to maintain our culture, a concern expressed by the late Samuel Huntington of Harvard. (Ayaan Hirsi Ali, a former member of the Dutch parliament and author of Infidel, makes the same point in an op-ed in today’s Wall Street Journal.) Mr. Sowell suggests that Washington has inverted our country’s motto, E Pluribus Unum (from many come one) to an emphasis on the differences between us for political expediency. Whatever the cause, our leaders in Washington have ignored this erosion of our competitive advantage. As I wrote yesterday, the answers are not rocket science, but they are imperative. Innovate and adapt. If we don’t, we die.

Tuesday, August 17, 2010

"The Dog Days of August"

Sydney M. Williams

Thought of the Day
“The Dog Days of August”
August 17, 2010

It used to be that if one wanted to read of doom and gloom, one turned to the Russian novelists. Today, reading stock market commentators, one gets the same depressing sense. Of course, the economy has provided an excuse for these growing feelings of despair. Rising foreclosures and falling home prices present a bleak backdrop, as does the continued declining confidence among homebuilders. An unemployment rate of 9.5%, combined with the “under employed” suggest 16% of the population is having a tough time. On July 21st, Ben Bernanke described the economic situation as “unusually uncertain”.

Down markets and sharply reduced volume have had the effect of souring market strategists, turning thoughtful commentators into grumpy old men and women. Robert Shiller, the Yale economist, said yesterday that he believes the odds of incurring a double-dip recession are better than 50%. David Rosenberg of Gluskin Sheff places the odds of a double-dip at 70%. Bob Farrell of Farrell Advisory wrote on Sunday, “…we think sentiment will change to more bearishness rapidly given the news background.” Vince Farrell points out that “weekly initial unemployment claims are getting back to the recessionary level of 500,000.” Mortimer Zuckerman, writing in Monday’s Wall Street Journal, looked at the political environment: “But if the economic scene these days is daunting, the political scene is downright depressing. We have a paralyzed system. Neither the Democrats nor the Republicans seem able to find common ground to address what is clearly going to be an ongoing employment crisis.”

The news is certainly downbeat. Besides the economic news, the world seems more precarious. A nuclearized Iran looks increasingly to be a probability, destroying the wishes of those who dream of a nuclear-free world. While the Balkans provided the kindling that ignited the world wars of the past century, the epicenter of terror has moved East and South to the Middle East. China threatens the status quo in the Pacific. In what can be seen as a prelude to ObamaCare, universal healthcare in Massachusetts now consumes 35% of their state budget, up from 22% in 2000. The combined weight of consumer and government debt is taking its toll and will noticeably worsen if the prophets of deflation prove accurate.

However, the depressing news of sluggish economic growth should come as no surprise. We are a consumer driven economy and, as a society, have lived beyond our means for years, so that today the consumer represents close to 70% of GDP. Given the decline in home prices and ten years of flat-lined stock prices, it is unsurprising that consumers are reducing expenditures and increasing savings. This we all know. We also know that the Federal Reserve kept interest rates too low for too long; we know that regulators looked the other way, as lenders encouraged those without means to borrow beyond reason, and we know that the government’s affordable housing mandate played a role in running up home prices. We were on the ‘Titanic’; we saw the iceberg; we never cut speed.

We also know the “cure” involves a focus on savings, debt reduction and a curtailment in spending – all sound decisions, but ones, by their very nature, that are bound to negatively impact the economy.

What has been missing has been the leadership necessary to right the ship and alter the course. By way of tax policy we should encourage investment and savings and discourage consumption, acknowledging the impact on the economy. We need to focus more intently on exports. We must look at the rest of the world, especially emerging nations, not as a source of cheap imports, but as growing markets for our goods and services. We need to be salesmen, not policemen. Again, tax policy can help. In a globally competitive world, we should reduce corporate tax rates. Our immigration policies are in shambles. Not offering citizenship to foreign students graduating from college, for example, reflects a vacuum in leadership and a failure to understand the importance of today’s competitive environment. Our schools are underperforming. An emphasis on supporting the unions has done very little to help educate students.

None of this is rocket science. None of this is particularly perceptive. Solving today’s problems does, though, require a modicum of common sense, something that leadership across this land should consider during these slow, lazy dog days of August.

Monday, August 16, 2010

"The Tale of Steven Slater - A Parable for Our Times?"

Sydney M. Williams

Thought of the Day
“The Tale of Steven Slater – A Parable for Our Times?”
August 16, 2010

It is not so much the antics of Steven Slater that speak about America today; it is the publicity provided him by the press and the empathy and even the pride people generally have taken with his bizarre behavior. Writing in Sunday’s New York Times, Benedict Carey classified him with those who have become “instantly sympathetic outlaws.” “If his story holds up,” Mr. Carey writes, “Mr. Slater was trying to strike a blow for civility.” Really? Cursing a passenger over the public intercom is “striking a blow for civility?” A Wall Street Journal/NBC poll, out on Friday, suggested Mr. Slater’s act reflected broad public anger. Todd Gillian, a professor of journalism at Columbia, was quoted in Sunday’s New York Times about Slater: “He’s a seemingly ordinary person who acted out this collective longing…” “Ordinary person…collective longing?” Have we, as a society, been reduced to emulating those who rudely toss out obscenities, violate laws and walk away (or slide away) from responsibility? Mr. Slater is a nut and, more important, he is dangerous. Normal people do not fly off the handle as this guy did. As for being dangerous, keep in mind, as an attendant he had access to the flight deck.

As Peggy Noonan noted in the weekend edition of the Wall Street Journal, “We are a service economy.” That means people must interact with one another. The irony is that as we have become more service oriented, we have become less polite, less civil. Too often, we applaud “emotional expressiveness”, as Rich Lowry put it in Saturday’s New York Post.

This is not to excuse the behavior of the passengers. Disregard and disrespect have become commonplace among too many who are being served. Manners do oil the machinery of verbal intercourse; long neglected, they have a place in our society.

Thomas Sowell, columnist and fellow at the Hoover Institute at Stanford, has a new book out, Dismantling America. Mr. Sowell was born in North Carolina, raised in Harlem; he was a high school dropout who joined the Marine Corps and ultimately graduated from Harvard, Magna Cum Laude. The book is a stern denunciation of our culture. We spend more time whining about the declining value of our pension plans than we do worrying about Iran getting nuclear weapons; we are more absorbed with “gays in the military” than we are about the fate of Afghan tribal leaders who have been compromised by documents stolen from the Pentagon; we seem more concerned about CEO pay than terrorists in Yemen, dedicated to killing us. Political correctness trumps reality. Mr. Sowell is concerned about the proliferation of nuclear weapons, especially while we are reducing our stockpiles. He sees us abandoning friends in Eastern Europe, in terms of cancelling a ballistic missile defense system; Mr. Sowell worries that Israel is no longer receiving the allegiance they deserve.

In terms of nuclear weapons falling into the hands of terrorists, Mr. Sowell suggests that “just one bomb…might get us to surrender.” “Indecision and wishful thinking” are not the answer. It is a question of morality and the fear is we are losing our moral sense, as exemplified by the fascination with, instead of the condemnation of, Steven Slater.

In contrast, Country Driving, a reporter’s reflection on current day China by Peter Hessler tells a very different story. The Chinese are still in the early stages of economic growth. It is the tale of an awakening, after almost a century of hibernation. The strict reins of Communism imprisoned and impoverished over a billion people for most of the Twentieth Century. As reins loosen, the bounties of capitalism begin to appear. In the United States, the economy showed great growth for the two decades following World War II. Following ten years of Depression and five years of War, consumers who had been denied spent lavishly, powering the economy, so that an enormous federal deficit went to a surplus in less than a decade. Imagine how long consumer demand will continue to drive China’s economy following almost a century of denial?

It is the contrast between China and the United States, in terms of what society deems imperative that imperils our country. In one society, the obnoxious is elevated and trivialities become more important than serious threats; in the other, the people are focused on simply raising their living standards. Which one is Rome in 476AD?

Friday, August 13, 2010

"Bonds - Certainty in an Uncertain World"

Sydney M. Williams

Thought of the Day
“Bonds – Certainty in an Uncertain World”
August 13, 2010

Even in times of uncertainty, excesses build. I am not suggesting that we are witnessing the rising of a new bubble, but intemperance seems to be forming in the bond market. While I am far from an expert, it seems to me that that market is displaying such signs. The prospect of deflation has sent investors scurrying to bonds, especially Treasuries. The yield on the Two-Year Note is 49 basis points and on the Five-Year it is 1.42% – not much of a return, even with the most recent CPI numbers of 1.1%. Perhaps more surprising is that more than half the Dow Jones stocks yield more than the Ten-Year Bond.

An unusual, and likely not sustainable, aspect of the current environment is that while the Fed’s balance sheet, since 2008, has risen from $1 trillion to $2.4 trillion, interest rates have fallen. Economics 101 teaches that when the demand for something increases the price goes up, not down. The decline in rates can be attributed to fear – thus chasing safety – and to concerns that we are in the early stage of a bout with deflation. There are many who fear that the upcoming decade may be to the U.S. what the 1990s were to Japan – a lost decade of little to no growth, accompanied by rising debt and declining interest rates.

The analogy, to me, is a little too cute and convenient. While I don’t dispute that, despite expected growth from the emerging world, growth at home is likely to be sub-par, the differences between Japan and the U.S. are too large to ignore. We have abundant raw materials. Japan has very few. In terms of population, we are two and a half times larger than Japan within a landmass 24 times bigger. Japan’s population is aging faster than any other country in the world and began declining in 2005. While our population is aging, it is not aging with the rapidity of Japan and, more importantly, it continues to grow. Our currency (at least, for now) remains the world’s reserve currency. The speculative bubble Japan experienced in the late 1980s, both in stocks and real estate, far exceeded anything we exhibited in 2000 and 2005. I don’t view lightly our problems, but I disagree with the comparison.

Enthusiasm for bonds is not limited to Treasuries. Both Investment Grade and High Yield bonds have performed well this year, so that four Dow Jones stocks – AT&T, Merck, Pfizer and Verizon – now yield more than the FINRA-Bloomberg Corporate Bond Index. Year to date, the yield on Investment Grade bonds has declined from 5.07% to 4.42%, while that on High Yield has fallen from 9.57% to 8.37%. In contrast, the S&P 500 is 2.6% lower than it was at year end.

According to the Securities Industry and Financial Markets Association (SIMA), corporate bond issuance in the U.S. this year has been $437 billion, down 7% from a year earlier. However, of that, $148 billion has been issued in High Yield bonds, up 77% from 2009, according to yesterday’s Wall Street Journal. It suggests that, while a desire for safety has driven Treasuries higher, a quest for risk within bonds has driven investors into the speculative arena of Corporates. In contrast global equity issuance, at $309 billion, is at its lowest level since 2005.

In the past couple of weeks, Kimberly Clark issued 10-year bonds at 3.62%, which compares to the 4.1% yield on their common stock. Last week IBM sold $1.5 billion three year notes at 1%, a record low, both in absolute terms and relative to the comparable Treasury Note. The yield on their common is 2%. While we do not follow, so have no opinion on the following companies, it is of interest to note that the dividend yields on AT&T, Verizon, Bristol Myers, Eli Lilly, Merck and Pfizer exceed that of the coupon yield on their bonds.

Historically stocks used to yield more than bonds, as stocks, lower in the corporate structure, were deemed riskier. But following the creation of the SEC, improved reporting standards, a return of some inflation and, as memories of the speculation of the 1920s began to fade, stocks began attracting investors, drawn to the potential of rising dividends. Over the next few decades, until early 2000, dividend yields declined, as stock values increased more rapidly than dividend growth.

Similar to stocks, there have been long cycles in bond yields. A chart of the Ten-Year, back to its inception in the early 1960s, shows what appears to be the view of a steep mountain – climbing from 4% in 1962 to 14% in the early 1980s to 2.68% today. Will this trend reverse? Certainly. When? I have no idea. But the “certainty” manifested in the meager return of “safe” assets should raise eyebrows. If deflation is not to be our future, watch out.

Thursday, August 12, 2010

"The Hewlett Board - Who Were They Representing?"

Sydney M. Williams
Thought of the Day
“The Hewlett Board – Who Were They Representing?”
August 12, 2010

The primary responsibility of a for-profit company’s board of directors is to the stockholders, to see that their interests are protected. It is not to the management; it is not to the employees; it is not to the community; it is to the shareholders, to protect their interests. The boards of not-for-profit entities are responsible for all stakeholders and the same is often true in Europe for for-profit businesses. But not in the United States.

For years boards of directors have seemed more interested in the benefits they receive and in acceding to the wishes of management than in representing the interests of shareholders. A friend recently pointed out that the auditors of many public companies, responsible to the board, increasingly bypass the board reporting directly to senior management. In too many cases these guardians of shareholders interests have abdicated their responsibilities.

During the 1990s and the first years of the current decade, many boards acquiesced to the issuance of lucrative option plans, even suggesting they aligned management’s interests with those of shareholders, which they did not. The size of some of these option grants allowed too many managers – not entrepreneurs or founders – to make hundreds of millions of dollars. If the underlying stock did well, existing shareholders were diluted; if it did not do well the options expired worthless, but no loss was incurred by the recipient, other than what “might have been.” In a few cases options were back-dated, an exercise in fraud.

The decision by the board of Hewlett-Packard last Friday to precipitously fire CEO Mark Hurd strikes me as a disservice to the stockholders. Larry Ellison, the founder and CEO of Oracle, both a competitor and partner of Hewlett, may have overreacted when he sent an open e-mail to the New York Times. Nevertheless, his point was clear. He argued that “the HP board failed to act in the best interest of HP’s employees, shareholders, customers and partners.” It was, he claimed, “the worst personnel decision since the idiots on the Apple board fired Steve Jobs several years ago.”

The firing stemmed from a lawsuit filed by a fifty-year old former actress, Jodie Fisher, who had been hired, under contract, by Hewlett in 2007 “to work at high-level customer and executive summit events held around the country and abroad” (her words). In other words, she was a conference planner or event coordinator, a function common among larger businesses. At some point, obviously, something happened (or allegedly did) and she filed a sexual harassment suit against Mr. Hurd. The suit was settled privately, without litigation. Ms. Fisher stated, “Mark and I never had an affair or intimate sexual relationship.” An investigation by the board found that Hewlett’s sexual harassment policy had not been violated. However, a presentation by the Washington, D.C. based public relations firm, APCO Worldwide suggested the possibility of months of bad publicity, so the board determined that Mr. Hurd had “exhibited a profound lack of judgment” and that he had to resign. A few “falsified” expense accounts were uncovered, providing the excuse.

According to Quentin Hardy, the Silicon Valley chief for Forbes, “Hurd left without either a chance to examine the expenses that got him fired, or a formal meeting with the board.”

Prior to Mr. Hurd’s elevation to CEO, Hewlett-Packard had a troubled time. Carly Fiorina (now GOP candidate for the U.S. Senate from California) was made CEO in 1999. She merged the company with Compaq Computer, which led to a proxy fight with some of the children of the company’s two founders. The board fired her in 2005 and elevated Patricia Dunn, who was fired the next year for allegedly hiring detectives to spy on directors, employees and journalists. Mr. Hurd, named CEO in October 2006, returned stability to the company and, more important, profitability and growth. During his four years as CEO, in a difficult market – the S&P 500 declined 21% – the stock of Hewlett has risen 5%, and that is after a 12% decline following the firing of Mr. Hurd last Friday! Earnings have risen, during his tenure at a compounded rate of 18% and sales at 8%, according to Mr. Hardy.

A clue to the board’s seemingly hasty decision might be seen in an interview with Mr. Hurd conducted by Quentin Hardy of Forbes, in April of this year. Mr. Hurd, who had arrived at Hewlett from NCR, had a reputation “for slashing costs (and heads)…” And HPQ had been known as a “warm and fuzzy” place to work. As Mr. Hurd wrote, “Wringing so much from so many people has a high cost, and Hurd has a reputation for being inflexibly demanding – even among admirers.” Nevertheless, the results, as Mr. Hardy points out, have been impressive and stockholders benefitted.

So, Mr. Hurd may have alienated some on the board and they may have been leaning toward replacing him anyway, but it is difficult to see how the decision will benefit shareholders – those for whom they are responsible.

Regardless, the sudden firing raises legitimate questions. How could a company of this size – 300,000 employees and an estimated $125 billion in revenues and $100 billion market cap – not have a succession plan? Interim CEO, Cathie Lesjak, the current CFO and a 24-year veteran of the company, has said she has no interest in the job. If Mr. Hurd was fired for cause why was he given an estimated $40 million severance package? Why was Mr. Hurd not given an opportunity to present his case to the board, once he had been vindicated of the sexual harassment charge? Did the board consider the effect of their decision on the stockholders?

If nothing else, the board’s action strikes one as rash and sanctimonious. As a good friend said to me on Wednesday, “I am sure I did worse things yesterday than Mark Hurd allegedly did, and I can’t even remember what I did.”

Wednesday, August 11, 2010

"A Retrospective"

Sydney M. Williams

Thought of the Day
“A Retrospective”
August 11, 2010

Forty-eight years ago on this date I boarded a bus in Boston, which deposited me at Fort Dix, New Jersey for two months of Army basic training. Looking back on those days, they seem simple in comparison to the complexities we now face. Even Vietnam was in the future. Of course there were concerns. Russia placed missiles in Cuba while I was in basic training, prompting President Kennedy to order a blockade of the Island and to put the Army on alert. As it turned out I remained at Fort Dix, but for a day or two the future looked uncertain.

Other events of that year serve to show how long ago that time was: “Lawrence of Arabia” won best movie; Robert Frost published In the Clearing; U.S. Marshalls accompanied James Meredith, as he registered at the University of Mississippi; Richard Nixon was defeated by Pat Brown in the California gubernatorial GOP primary; a U.S. stamp cost $0.04; Marilyn Monroe died of a drug overdose and Johnny Carson took over the “Tonight Show”. Federal outlays in 1962 were 18.8% of GDP. In terms of interest rates, the Ten-Year yielded 4%, the prime rate was 4.5% and 30-Year mortgages were about 5%. Rates were headed substantially higher over the next two decades, with the Ten-Year reaching 16% in the very early 1980s.

In contrast, “Avatar” won this year’s Oscar at the Academy Awards and Steig Larson’s, The Girl with the Dragon Tattoo continues to be a best seller. The governor of Arizona signed a law designed to enforce immigration laws, later deemed illegal by the courts. Republican Scott Brown won the Senate seat in Massachusetts occupied for 47 years by Democrat, Ted Kennedy. A U.S. stamp now costs $0.44; Gary Coleman died at the age of 42 and Jay Leno returned to the “Tonight Show” replacing Conan O’Brien after six months. The federal budget, this year, will approximate 28% of GDP. Today, the Ten-Year yields 2.78%, the prime rate is 3.25% and a 30-year mortgage can be had for 4.5%. With a whiff of deflation in the air, the general expectation today is that rates will decline further.

In the early 1960s, we were still four or five years from what would prove to be the end of the post-War bull market and it would be two decades before the start of another. That one began with inflation and interest rates coming off very high levels and with the tax cuts implemented by the Reagan administration. Green-mailers forced needed efficiencies in board rooms and the end of the Cold War brought cuts in Defense spending in the 1990s.

Today we find ourselves ten years into a secular bear market that began when the hyper-extended internet-tech bubble collapsed in March 2000. While inflation was the demon of the 1970s, deflation is the scare today. I agree with Jim Grant when he notes that “life is interesting because every cycle is different.”

Nevertheless, the intervening years did see progress. The population increased 68%. Today, women comprise 44% of the workforce. Civil rights greatly evened the playing field for minorities. Per capita GDP has risen from $14,099 to $46,300. The S&P 500 has risen from 63.1 to 1121, a compounded return of 6%. Earnings for the same index have risen from $3.67 in 1962 to an estimated $75.00 for 2010, a compounded return of 6.4%. If one has the ability to look out several years, it is hard not to imagine that the returns to stocks should do better than the 2.8% return one can get on a Ten-Year or a little less than 4% for thirty years.

There is a great deal of uncertainty in the market and about the economy. Many are convinced that America’s best days are behind her. Fifty years ago the threat of nuclear holocaust hovered over the world, as Hiroshima and Nagasaki were fresh in everyone’s mind, but a balance of power between the Soviets and the West led to tenuous peace. America, the saviour of Europe from Nazism, was considered the “good guy”. The Soviets wore the “black hats”. In space and in arms the Soviet Union competed with the United States, but at the sufferance of her people and the enslavement of her satellite states. Europe was still recovering from the War and Japan had yet to achieve the prominence she would in the next couple of decades. However, the ensuing years saw the U.S. mired in Vietnam, a war eventually lost. OPEC flexed their muscles, removing controls on oil, humbling the mighty United States. The victory of the Cold War brought with it the elimination of the balance that had kept the world safe for four and a half decades and had the effect of removing the “white hat” worn by America for so many years.

In 1962, the U.S. economy was thirteen times larger than that of China; today it is less than three times. The world is different. While we remain the largest economy in the world and still have the greatest military, it is necessary that we view the rest of the world as partners, not ones over which we have dominion.

As we all know the future is unpredictable, but we can be certain that disruptions will occur. Growth is never even. It won’t be for us and neither will it be for those emerging countries we most admire today. Perhaps the greatest asset we have today is the fact that we seem to look to the future more skeptically and not with the blind faith we exuded in those distant days when I boarded the bus in Boston on August 11th, 1962.

Tuesday, August 10, 2010

"Jobs - Education and Innovation Help, Unions Hurt"

Sydney M. Williams

Thought of the Day
“Jobs – Education and Innovation Help, Unions Hurt”
August 10, 2010

The painfully slow process of job creation has been making a difficult recession more so. The folks at PIMCO have taken to calling this period a “new normal”, an economy in which the growth rate is too slow to rapidly bring down the unemployment rate, thus an economy more dependent on government intervention.

Employment has been resistant, but that was also true for the mild recession of 2001-2002 – a “jobless recovery” is the way that recovery was depicted by the press. The numbers are dismaying – 14.6 million of the unemployed have been out of work for more than six months. Laura Tyson, as quoted in the New York Times, says we will have “an elevated unemployment rate for several years.” In the same paper, Robert Gordon, a professor of economics at Northwestern, says “The situation is devastating.” In Monday’s Wall Street Journal, Mark Whitehouse noted that 4.3% of the workforce has been unemployed for “more than six months – a level much higher than any other recession since 1948.” Yet, in the same Journal report, the Labor Department suggests that the number of job openings has risen twice as fast as actual hires – a disparity most notable in manufacturing. “If”, Mr. Whitehouse wrote, “openings were getting filled as they usually do – the U.S. should have about five million more gainfully employed people than it does.”

Ninety-nine weeks of unemployment benefits, at a rate substantially above the minimum wage, has dissuaded some workers from seeking employment. Regardless, the situation reflects significant changes that have taken place in the American workplace over the past few decades.

In my opinion, the problem stems from the transition that began in the early 1960s, as we evolved from a unionized manufacturing economy to a non-unionized service economy. At the same time, Europe and Asia were emerging from the effects of World War II and their lower costs for labor attracted manufacturing offshore. Currency markets became increasingly sophisticated; trade was easier and freer. The world was becoming flatter and, importantly, less unionized. Domestic job growth occurred in services, finance, healthcare and technology, hardly something a steel or auto worker knew much about. And, of course, many of the service jobs did not pay as well as the old union jobs. While medical technicians, programmers and financial analysts benefitted from these changes, those without such skills discovered that flipping burgers did not pay as well as their old auto assembly job.

As we entered the 1980s, creative debt instruments (particularly in mortgages, but also in credit cards), easier credit conditions and lower interest rates served to mask the underlying problem. A relatively strong Dollar allowed for cheap imported goods such as clothing and electronics and had the effect of delaying a fundamental change in our economy that was beginning to take place – that we were losing our competitive presence, dragged down, in large part, by unions mired in the past and blind to the changes taking place.

In 1978, China, realizing that Mao’s Communism was not working, began its path toward modernization, while our manufacturing sector remained riveted to the past. As a country, we remained in denial as to the changes going on around us.

Much has been written about the widening income gap in the U.S. and the fact that wages for many have remained stagnant for several decades. That is a fact, and an answer needs to be found. But there is no returning to the old days. The world is global and so is the competition.

Where America did remain competitive it has done well – healthcare, technology and finance. It is both sad and ironic that the administration has chosen to place two of those areas under increased regulation, while continuing to play politics with the unions that failed to adapt to a changing economy. Creative talent poured into investment banks innovating technologies, producing derivative and debt instruments, allowing offshore businesses to more quickly and less expensively finance their growth. It was a case of American creative and competitive talent rising to meet a new challenge. It is true that some on Wall Street took advantage of the system and they deserve punishment. Healthcare would be more efficient and effective if the consumer played a bigger role, but penalizing success at a time of increased global competition does not seem to me to be a winning strategy.

There is plenty of anecdotal evidence that manufacturing can continue to be a success in this country. The best and most recent example is not GM; it is Volkswagen’s decision to open a $1 billion, energy saving, non-union plant in Chattanooga, capable of producing 150,000 cars a year and scheduled to go into production in 2011 bringing two thousand jobs to the area. That tells you that America, as a manufacturing hub, is not dead – at least not in the eyes of Germans.

The answer to succeeding in today’s global world is first, education. We must ensure our students understand the nature of today’s competition, where it is and what it takes to succeed. We cannot emulate everything our competitors do, nor should we, but we can learn from them. We must play to our strengths, the most important of which is that this is a nation to which people from around the world still want to come. As a friend of mine recently put it, years ago immigrants added to the collective intelligence of the nation. Today that assertion is questionable. We will not grant citizenship to newly created college graduates, yet we do very little to deter illegal immigration. It doesn’t make much sense.

The answer is not in shoring up public unions at the expense of the private sector. As the Wall Street Journal noted this morning only three metropolitan areas reported higher personal incomes last year – Washington, D.C., and two areas with a strong military presence, San Antonio and Virginia Beach. We need the public sector. Society cannot function without it, but we must keep in mind that the sole source of revenue with which to pay government employees are the taxes paid by America’s workers and corporations.

We must encourage business start-ups and innovation. We must understand that unions, no matter the nobility of their past, must learn to adapt to a changed world, or risk dragging down a generation of young men. In passing massive healthcare legislation, the administration sacrificed private sector confidence. Growth depends upon its restoration. Having the second highest corporate tax rate in today’s world seems absurd if we expect to be able to compete with China, Brazil or even Canada. As I wrote last week, the American dream does not have to be dead; we must awake to the reality of today.

"Family Reunion and the Miracle of Life"

                                                                                                                                                                             Sydney M. Williams
                                                                                                                                                                             August 11, 2010
Notes from Old Lyme

“Family Reunion and the Miracle of Life”

“Come, speak to me of times gone by.
Remind me of our carefree youth.
Recall with me those nights we sang
And thought we knew the truth.”
                                                                                                                   Susan Noyes Anderson
                                                                                                                   “Reflections on Another Day”, 2003

This past weekend the children, grandchildren and great grandchildren of my parents, celebrated what would have been my father’s hundredth birthday at the Crane Estate in Ipswich, Massachusetts, not far from Gloucester where he and my mother met in 1937. The venue was the inspired choice of my sister Charlotte and made one wish one’s grandfather had gone into toilets.

The estate consists of 2100 acres with a large house and a number of outbuildings. We had the “casino” and what must have been at one point a guest cottage. The lawns rolled east over two hummocks, three or four hundred yards to a bluff from which one looked out on salt marshes and the Atlantic Ocean.

The “casino” was most likely once a large party room for the young where the noise from the carousing and the music would not have disturbed those in the main house; for us it was a place to serve a buffet lunch. Photos were taken; we walked to the bluffs. But best of all, better than lunch or the view, was the opportunity to visit with siblings, cousins, nephews, nieces, a plethora of in-laws and a sprinkling of “significant others”. Many of the great grandchildren I was meeting for the first time.

My parents had 9 children; from those came 18 grandchildren and now – if I have counted correctly – 26 great grandchildren. It is startling to see what happens, over a few years, if you leave a man and a woman alone for a few minutes!

My three sisters – Betsy, Charlotte and Jenny – brought with them photos, newspaper clippings and an assortment of memorabilia including a slide-show that Betsy set up of photos from my parents’ childhood to the present, a wonderful cornucopia of lives lived and still living. My brother, Frank, brought copies of a recording of an interview with my mother, taped two and a half years before she died in 1990. (I brought 38.5% of the great grandchildren!)

Though his life was cut short by cancer, my father’s fifty-eight years saw remarkable change. The Wright Brothers piloted man’s first flight seven years before he was born, in December 1903. Less than a year after his death Neil Armstrong walked on the moon. He was born during the halcyon days of the Twentieth Century’s first decade, before the horrors of the trenches in World War I traumatized the world, and thirty years before the apocalypse that became World War II, a war in which he served in Italy, as an infantry soldier with the 10th Mountain Division. Despite those experiences and his work as a sculptor, he considered his most important contribution to be, as he wrote in a 25th reunion note for Harvard, his nine “ideas”, the children he sired.

A family reunion makes one realize the marvel of life and the extraordinary odds against any one of us being born. Not only did our parents have to meet, but so did every other ancestor going back to when life first evolved. And, not only did they have to meet, but the genesis of each of our lives depended upon a specific sperm meeting a specific egg – the odds of that happening has to be measured in the billions of trillions. The best description that I have read that speaks to that miracle is a line from Tolstoy’s Anna Karenina. It is at the point when Levin’s wife Kitty has just given birth. Levin observes: “…there at the foot of the bed, in the deft hands of Lizaveta Petrovna, like a small flame over a lamp, wavered the life of a human being who had never existed before and who, with the same right, with the same importance for itself, would live and produce its own kind.”

This is the gift from our parents and it is why we honor them. Those of my generation have done the same for our children who, in turn, have done the same for theirs, and so on down through the years, in the continuum of life.

As my wife and I exited the grounds down the winding drive past fields and copses, basking in the afternoon sun, the pleasure and comfort of being with “family” reaffirmed their importance and was a living manifestation that life is truly a wonder, to be valued as something extraordinary, to be savored and to be lived to the fullest. We owe no less to those who created us.

Thursday, August 5, 2010

"The Missouri Vote - What Does it Portend?"

Sydney M. Williams

Thought of the Day
“The Missouri Vote – What Does it Portend?”
August 5, 2010

Missouri, located near the center of the United States – a bellwether state – with a Democratic governor and a congressional delegation that is almost evenly divided between Democrats and Republicans, voted on Tuesday to reject a provision in U.S. healthcare bill requiring people to buy health insurance. The vote was overwhelming, 71% versus 29%.

A day earlier, Henry E. Hudson, a U.S. Federal Judge for Virginia’s Eastern District, ruled that a challenge by Virginia’s attorney general to the same provision in the healthcare bill, mandating the purchase of health insurance, could not be blocked, as the administration desired. While Judge Hudson’s decision does not address the merits of the bill, there is little question that the vote in Missouri reflects a deep antipathy toward the measure and is not simply a “Republican straw poll”, as Ethan Rome, executive director of Health Care for America Now, would have one believe.

The intricacies of the law are far beyond my capabilities, but the argument against the forcing of people to buy insurance will apparently turn on an interpretation of the interstate commerce clause, which the administration argues gives the federal government the right to mandate that individuals buy insurance, or pay a fine. In other words, the individual cannot opt out. Opponents to the measure agree with the State of Washington’s attorney general Rob McKenna who in March said that the individual mandate is “an unprecedented expansion of the federal government’s powers that deserves scrutiny by our courts.”

This provision – requiring the purchase of health insurance by all people, or pay a fine – is critical to the success of the healthcare bill, as it was passed. Without it, private insurance companies, with a government determined medical loss ratio and a requirement they must accept those with pre-existing conditions, would have to charge prohibitive rates (something the government would likely prohibit or limit). Without the latitude to raise rates, insurance companies risk bankruptcy; so they are likely to exit the business. (Only the government is in the business of operating a business at a loss, as they have tax payers as a backstop, which suggests, to me, the increasing likelihood of a public option.)

Even with the provision the insurance companies will still be at financial risk, depending on the dispensation of the “fine”, whether it is paid to the insurance companies or to the government. The consequence is likely to be a single payer – the U.S. government. In passing the bill in March, the administration assured the American public there would be no single payer. They even abandoned a “public option”, much to the dismay of liberals like Senator Jay Rockefeller. My guess is that it is coming. Either way, the costs are going to be enormous; they will only add to the future obligations of the U.S. taxpayer, and the individual will be further divorced from decision making about his or her personal health situation.

While the vote in Missouri (and expected referendums in states such as Arizona and Oklahoma scheduled for November) was welcome to those of us who feel that nationalized, centralized healthcare is a road to perdition, it is likely that any final decision will rest with the Supreme Court, which will determine the constitutionality of the federal mandate. Since the Supreme Court generally acknowledges that federal law supersedes state laws, I assume we are stuck with ObamaCare.

The administration cleverly allowed for the quick implementation of those portions of healthcare popular with the public – eliminating the ability of companies to deny coverage for pre-existing conditions and extending the age for which a young person can stay on their parents’ plan. The more controversial and onerous aspects, such as the mandate, were delayed, giving people time to become used to the generous up-front portions. And, of course, as Senator Harry Reid and Speaker, Nancy Pelosi keep reminding us, we will all like what we get once we know what is in the bill, even though they carefully excluded themselves from demands of the bill.

Unless a groundswell of opposition develops it seems likely we are on the road toward a veritable national healthcare system, with a single payer, which will prove, over time, more expensive, less personal and provide a lower quality of care. Ironically, this is all occurring as the United Kingdom’s sixty-year experiment with nationalized healthcare is beginning to unwind, reducing the bureaucracies and taking on more of the characteristics of the private sector by giving the doctors more decision making power. Lessons of history are never learned by those who put personal policy determinations ahead of the interests of the people.

Wednesday, August 4, 2010

"The Cordoba House Project"

Sydney M. Williams

Thought of the Day
“The Cordoba House Project”
August 4, 2010

While the arguments put forward by the Muslim community to build a $100 million mosque/community center two blocks from ground zero are undeniably correct – promoting integration, tolerance of differences and community cohesion – the project is also unarguably provocative and insensitive.

Among the principals upon which the United States was founded was freedom to worship. Religious intolerance had sent the Pilgrims to these shores in 1620. To deny Muslims the right to build a mosque (or a facility that houses a mosque) where they choose goes against our history of liberality and impartiality. On the other hand, the Muslim community should be sensitive to the feelings of the hundreds of thousands who suffered the affects of an attack, committed in the name of Islam.

Most of the City’s officials have supported the Cordoba House project, including Mayor Bloomberg who piously observed: “If somebody wants to build a religious house of worship, they should do it and we shouldn’t be in the business of picking which religions can and which religions can’t.”

But feelings against the project run deep and Mr. Bloomberg and his sanctimonious cohorts appear to ignore the possibility that the consequences of letting the project to go forward will possible promote more hatred, less understanding and more disunity. Nevertheless, I suspect Mr. Bloomberg had little choice in his decision. He is the mayor of the most diverse city on Earth and can ill afford to show bias no matter his personal feeling, though he could have warned of possible effects.

An interesting (and instructional) comparison has been made by several people between this situation and the one involving the Carmelite nuns who wanted to establish a convent at Auschwitz in 1984. An impasse had been reached between the nuns, who could see nothing wrong with desiring to pray at the site of the atrocities for the souls of those who died in the Nazi’s gas chambers, and the Jewish community to whom the ground was sacred. Ultimately Pope John Paul II wrote the nuns asking them to accept his decision to move the site, but to remain in the city and continue their mission. They did and in time the anguish and anger dissipated.

Yesterday, the Cordoba Project’s last hurdle was overcome when New York’s Landmarks Preservation Commission voted 8-0 not to grant protected status to 45 Park Place, the location of the proposed Center. All that remains now to prevent the completion of the 13-story Islamic center and mosque are a series of lawsuits.

There is one person who could stop the project and that is its architect, planner and biggest booster, Imam Feisal Abdul Rauf. Obviously that is unlikely, but in an open letter sent yesterday via the Wall Street Journal by Dan Senor, a senior fellow at the Council on Foreign Relations, a former senior advisor to the Coalition in Iraq and a resident of lower Manhattan called on the Imam to consider the risks of the project. Mr. Senor wrote: “Rather than furthering cross-cultural and interfaith understanding, a Cordoba House located near Ground Zero would undermine them. Rather than serving as a bridge between Muslim and non-Muslim peoples, it would function as a divide. Your expressed hopes for the center not only would never be realized, they would be undermined from the start.”

That is the risk. However, construction is likely to proceed, because it is politically correct and the “right” thing to do. It is difficult to believe that Imam Feisal did not anticipate the reaction he has received from those whose relations perished on 9/11 and the millions of others affected by the attack. It is difficult to conclude that such a decision was not a deliberate attempt at provocation. It is difficult to imagine that Imam Feisal did not realize that tolerant, but sanctimonious New York City officials would find it impossible to deny his request, no matter how distasteful to them individually.

The consequences, as Mr. Senor wrote, could prove “counterproductive.” What is needed and is missing is a person with the wisdom of Pope Paul II. As William McGurn wrote so eloquently in yesterday’s Wall Street Journal, there are times when one must recognize “that having the right to do something does not mean it’s the right thing to do.” Imam Feisal, though, could be that man. Imagine the reception such a magnanimous act on his part would receive should he decide to back away from his prior decision. It would go a long ways toward reconciling the Muslim faith with the religious freedom of his adopted country. It would truly help achieve his stated goals – integration, tolerance and community cohesion. Unfortunately, such a possibility seems unlikely.

Tuesday, August 3, 2010

"Will Macro Fears Impair Stock Performance?"

Sydney M. Williams

Thought of the Day
“Will Macro Fears Impair Stock Performance?”
August 3, 2010

As investors we find ourselves in an odd and uncomfortable period. (Of course, truth be told, we always view our current condition as unique and challenging, as it is inherent to investing.) The macro situation is sketchy at best. The near-collapse of the financial system and the ensuing recession spooked investors. Nobody knows the consequences of the health care bill, nor what the impact of financial regulation will be. The consumer – 70% of GDP – appears to be sensibly increasing his savings, but at the detriment to growth. Fannie Mae and Freddie Mac continue to swill dollars like hogs that have been starved for a week. There are a few states and some municipalities that seem close to bankruptcy. Debt and entitlement obligations are swamping our government and the Federal Reserve is determined to exercise every tool, including ‘helicoptering’ dollars to creditors in China, Japan and beyond.

Stock investors are decidedly nervous and yesterday’s rally did little to alleviate worries. Adding to equity investor’s concerns have been the proliferation of Index Funds, ETFs and algorithmic trading platforms which have caused an increase in the correlation of stocks, rendering stock picking less productive. As a result, macro calls have risen in importance, which is unfortunate because they are often wrong.

Nevertheless these same conditions, which have proved painful to equity investors, have been viewed positively when viewed through the prism of bond investors. Bonds have put in a stellar performance year to date. The yield on the Ten-Year has declined 41%, while that of the Two-Year has fallen 43%. Corporates have also done well with yields dropping 11% for Investment Grade and 13% for High Yield. In contrast, the S&P 500 is up less than one percent. Bond underwritings in July (excluding all agency and government backed paper) rose 76.5% from May with $66.6 billion in deals. In contrast, equity underwritings declined 19% in July versus May to $8.73 billion.

Measures of nervousness – gold, the Dollar and the TED spread – are moderately elevated versus year end, but off their highs, suggesting confidence in spite of macro fears, is returning. Gold is up 8% on the year, but down 6% from its high in mid June. The Dollar Index is up 3.4% for the year, but down 8.8% since its high in early June. The TED spread is 29 basis points versus 14 basis points at year end; however it is down from 36 basis points at the end of May and, importantly, lower than it was before we felt the full force of the credit collapse in the summer of 2007.

In markets, uncertainty breeds opportunity and certainty generates risk. Over the past three years nervousness upended certitude – and properly so. We came close, in the fall of 2008, to annihilation. This concern has been captured by a skulk of Cassandras – commentators, strategists and economists – airing their views on the internet, via CNBC and Bloomberg and even, for dinosaurs like me, in newspapers.

Anecdotally, it appears to me that the rise of these pundits has been accompanied by a decline in the number of analysts pitching a specific stock. In the late 1990s the opposite was true. Economists and others calling for sanity were but wisps in the wind. Who wanted to hear from a practitioner of the dismal science when you might get the goods on a stock which might double in six months?

We all know what happened in 2000-2002 and I would suggest that too much time spent on macro concepts may be akin, to distort an old saying, of missing the trees for the forest.