Month: May 2011

Tidbits

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This week is a “tidbit dump” of information that I thought was interesting.

– Local governments, municipal and county, employ 14.2M people, about 10% of the workforce.  Local government employs more people than the entire manufacturing sector does.  Less than half of the population of the U.S. works.

– The National Ass’n of Realtors offers assessments of local real estate markets, including employment, occupation mix, mortgage defaults.  Current reports are available by subscription but recent reports are free.

Federal and state governments have large pension and employee costs that are tied to the CPI or inflation rate.  Social Security payments rise with the CPI.  Federal, State and local government employees receive annual cost of living adjustments (COLA) to their pay that is based on the CPI.  The amounts of money involved are staggering.  Retirement benefits will total about $500B this year.  A 1% increase in the CPI is an additional $5B paid under this program alone.

– Doug Short is a retired IT consultant whose web site contains various commentaries on markets and personal economics.  Here is a historical overview and explanation of the Consumer Price Index.  It includes a decade long chart of the percentage rise of the various components of the CPI.  The rather steady rise of the food component over the past 10 years contradicts the Federal Reserve’s assertion that food is a volatile component.  The Fed leaves this supposedly volatile component out of it’s calculation of “core CPI” to get what the Fed considers a more accurate assessment of inflation pressures.  This methodology understates inflation, in my opinion, and contributes to the poor monetary policy that the Fed has adopted in the past 15 years.

– In an interview with former President Bill Clinton after the shooting of Congressperson Gabrielle Giffords :
These words[political invective] fall on the serious and delirious alike, they fall on both those who are connected and unhinged.

– Each year U.S. national parks receive as many visitors as the population of the U.S.

– Should a person nearing retirement take an early Social Security payout or wait? Steve Vernon with CBS Money Watch examines the pros and cons in this article.  The reader comments are as interesting as the article.

Money Machine

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Investors who consider themselves to be conservative will sometimes keep a relatively small amount of money aside for riskier assets to “juice” overall returns.  This riskier pool may be 5% or less of a total portfolio and can be targeted toward smaller companies with higher growth rates and potentially higher returns.

What could be more enticing than investing in a Chinese natural resources company that is listed on the Nasdaq global exchange?  China is a fast growing economy, a growing middle class and a major manufacturing center which uses natural resources.

A Yahoo Finance article and video reviews one particular pitfall of investing in a company whose “home” is in a country that has less stringent financial oversight of publicly listed firms.  As on a “wet vac”, money machines that entice investors with the promise of higher returns have two ports, one for suction and one for blowing.

Ka-Ching to the Future

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“Sell in May and go away” is an old maxim for stock traders and is based on the sentiment that in most years the summer stock market either goes down or sideways.  For the long term investor, would the summer “doldrums” be a good time to make one’s annual IRA contribution? 

The S&P500 index is a familiar benchmark for the U.S. stock market as a whole.  I ran three scenarios: 1) investing $3000 on July 1st of each tax year; 2) investing $3000 on Jan. 31st of the following year for the previous tax year (year end bonus?); and 3) waiting till the last minute, April 15th, to make one’s contribution.

I expected a big KA-CHING! for those investing on July 1st of each year.  Not only would an investor capture a supposed lull in the market  in July but would have the additional benefit of having one’s money invested several months longer each year.  I was surprised at the relatively small advantage that a July 1st contribution gives the investor.  Below is the number of shares an investor would have accumulated during the 17 tax years 1993 – 2009. (Click to open in separate tab)

At the end of 2010, the value of the shares bought during those 17 tax years is shown below.  The investor contributing each July has 2.5% more value than the person waiting till the deadline the following April.  But no Ka-Ching!

For nine tax years, an investor contributing on July 1st, got a good deal.  There were six years in which the investor got a better deal by waiting till January or April of the following year to make their contribution.  In two years, it didn’t matter which of the three dates an investor made the contribution.

Then I examined the frumpy, boring method of IRA investing – a monthly contribution to a mutual index fund that mimics the performance of the S&P500 index. Below is a chart of the shares accumulated by investing $250 each month.

KA-CHING!  While the July investor accumulated 2.4% more shares than the April investor, the monthly investor has 7% more shares than the wait-till-the-last-minute investor.  At the end of 2010, those extra shares totaled $3400 more than the July investor, and almost $9000 more than the April investor, an extra return of  three years of contributions!

It may be possible for an investor to gain additional return by “timing” one’s contributions to a retirement account.  One could backtest any number of longer term trading systems, keep a vigilant watch on the market and possibly achieve higher returns.  That would be the exciting way to build an IRA nest egg.  Waiting till April 15th each year to fund an IRA is another dramatic approach.  These solutions make for good stories to tell family and friends.  The third approach – I’ll call it the Third Way to make it sound more exciting – may be the (yawn) monthly system.

Whatever system one chooses, the charts above illustrate the returns provided by regular investment.  An investment of $51K during the 17 years of this example returned an additional $30K to $35K if valued at the end of 2010.   Even at the market low of July 2010, the monthly investor would still have “made” $18K, or six years worth of contributions, on their savings. A good scout helps old people across the street, don’t they?  Regular, disciplined contributions to a retirement account is like being a good scout to our future selves, a helping hand across the street of retirement. No, there is no badge, just some ease of mind.

Oil Suck

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After rising to almost $115 a barrel (42 gallons per barrel), oil slid to $98 a barrel in this past week.  Across the country prices at the pump approach and in some states exceed $4 per gallon.  When gas prices rise, presidents call for an investigation into speculative trading and market manipulators and this president is no different.  This past week President Obama called on his Attorney General, Eric Holder, to lead a “Fraud Squad” which will root out those nefarious speculators and bring them to justice. 

There’s only one problem – the speculators are state, local and private pension funds buying “paper oil”, Joe and Mary hoping to grow their college fund by buying a few hundred shares of an oil related ETF.  Frank hopes to pay off his student loans with a proven timing system on the Proshares Ultra Oil and Gas ETF (DIG).  Hedge fund managers include oil as part of a commodity exposure mathematically designed to mitigate inflation risks to their clients’ portfolios.  None of these speculators either produce or want delivery of any oil.  The companies – airlines, for example – that do use lots of oil and trade oil futures to lock in operating costs probably daydream that some administration or some Congress or the feeble Securities Exchange Commission or the Chicago Mercantile Exchange would keep those who buy and sell “paper oil” out of  the market.

For the past half century this country has sucked on oil.  Below is the daily U.S. crude oil consumption during the past 30 years as reported by the U.S. Energy Informaton Administration (EIA) (Source) Consumption has declined slightly in the past two years, thanks to the recession.  Recent quarterly figures from the EIA, however, show that 2010 consumption was already up to 2008 levels.

Since 1980, we have introduced more fuel efficient cars and “cut” our gasoline with ethanol.  Our population has concentrated more in urban areas, and we have spent billions of taxpayer dollars on new and improving public transportation.  I combined data from the EIA and the Census Bureau to get a per person per day consumption rate.  All this hard work and we still suck up gas.

Each day all the people on the planet use about 85 million barrels of oil.  The U.S. uses almost 20 million barrels a day, a bit less than a quarter of the world total.  Ten years ago, we consumed a bit more than a quarter.  Growing prosperity in developing countries is increasing the demand for oil.

In the 1970s, President Nixon spoke about developing a comprehensive energy policy and every president since then has repeated the pledge.  Do we have such a policy?  Not a chance.  This country sits on top of vast reservoirs of natural gas yet there is no comprehensive plan to increase the use of this clean burning fuel.  In other countries, Ford and GM make cars that use Compressed Natural Gas (CNG) but the lack of any cohesive U.S. policy to promote this technology and delivery system has forced carmakers to abandon this country, the largest oil market in the world.  For more info on CNG vehicles.

Federal and state politicians will likely continue to twiddle their thumbs as they have done for the past 40 years. Exxon Mobil is the largest oil company in the world and will likely benefit from increasing global demand for its products.  When  President Nixon spoke about a comprehensive energy policy, Exxon’s stock traded at an adjusted closing price of less than $1.  Today the stock trades at $83 and they pay a dividend, currently about 2.3%. 

As shown above, our consumption has changed only slightly despite reduction measures.  Older people generally drive less and as the population ages, miles driven will likely decrease during the next 20 years.  But will our overall consumption decrease?  We like big in our cars.  We like trucks and SUVs.  We like to drive.