Author: sgstofka

Gold ETFs

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The rise in gold prices has prompted a growing popularity in the SPDR Gold Trust ETF (GLD), which buys and holds gold bullion. The IRS regards ownership in this trust as an ownership in a collectible and taxes profits in the trust accordingly.

An investor who holds GLD for a year or more and sells for a profit might expect to pay the 15% long terms capital gains rate. However, the profit is taxed at the 28% collectibles rate. For this reason, an investment in gold bullion is more appropriate in an IRA or other tax advantaged plan.

Another way to play the gold market is to buy Market Vectors Gold Miners (GDX), an ETF that owns shares in gold mining companies. The average cost to produce an ounce of gold is about $850 – $900, so that a gold price above that amount is profit to the mining companies. Because of this leverage, mining company stocks are more volatile than the bullion itself. Long term profits in an ETF like this one would be taxed at the usual 15% long term capital gains rate.

Employed Not

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The often quoted unemployment rate of 10.2%, dire though it is, is only half of the unemployment rate in the construction industry, which stands at 19.1%. The lack of jobs in a predominately male work force has lowered the percentage of men in the work force so that women now make up 50% of workers, a first in the American economy.

Neither of these unemployment rates accounts for the number of people working part time jobs because they could not find full time work or those discouraged people who have stopped looking for work in the past month. That U6 rate is over 17%. In the construction field, it may be over 25%.

Smaller road building projects which received stimulus funds earlier this year have about run their course. Although housing sales have shown improvement, there remains a glut of pending foreclosures that will continue to amply supply the demand for houses in 2010. This steady influx of supply will only dampen new housing construction and continue to put pressure on construction related jobs.

For those who built their working careers in construction during the last 15 years of steady job prospects, this will be a life crisis requiring many to rethink their career path and develop new job skills.

Trends

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A few trends that have caught my attention in the past month:

Credit card offers in the mail are down 77% in the past year.
Gold, bonds, commodities, and stocks are up. It is unusual for all of these asset classes to rise at the same time.
Women now account for 50% of workers, up from 35% thirty years ago.
Only 25% of workers aged 55+ have saved more than $250K for their retirement (excludes house equity and pensions)
On average, the Employee Benefit Research Institute reports that Americans aged 65+ get almost 40% of their income from Social Security. In 2007, the median income for those 65 and older was $18K.
If you had 60% of your portfolio invested in a mix of stocks and 40% in bonds before the banking crisis, you have lost nothing in the past year.
In the past ten years, the Federal Reserve reports (click on debt) that consumer debt has increased 63% and mortgage debt has shot up 135%. Debt in the public sector has almost doubled. Both federal and state debts have risen 95%. For perspective, the Consumer Price Index has gone up on 30% in the past ten years.

Obscene Profits

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In any hotly contested debate, it is often difficult to separate the rhetoric from the facts. House Speaker Nancy Pelosi has decried the “obscene profits” of the insurance industry. How obscene are those profits?

Profits are, in fact, obscene – obscenely low, that is. On average, health insurers posted a 2.2% profit margin in 2008. Stodgy railroads made 5 times the profit margins that the health insurance companies did. In a good year, health insurance companies have not made more than 8%.

So why do health insurance premiums continue to rise by 7 – 8% each year, far above the average 3% rise in the Consumer Price Index? Because the insurance companies continue to pay out ever increasing amounts of money to health care providers. Some of that additional money is due to increased tests, more care, and an aging population but some is – dare I say it – fraud?

A doctor who works for a large health organization was recently admitted to an affiliated hospital for several days to have her baby. Familiar with the cryptic billing codes, this doctor noticed many discrepancies between the care she actually received and the care that was billed to her employer. As one example, a “hello, how are you doing” visit from her physician that lasted less than a minute was billed as a 15 – 20 minute check up. Therapies were billed but not received. Over the counter medication was billed at a 100+ times of the retail price. This was not a tale of Medicare fraud but of one member health provider gouging the group it belonged to, an indication that the practice might be both systemic and widespread. How many billions of dollars are “greased” from the system each year?

Stay the Course

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In a mid 2009 survey of 3000 investors, the giant fund group Vanguard found that 21% of stock investors had sold some of their holdings during the recent downturn. Almost as many, 17%, had increased their holdings during the crisis. Only 28% of respondents said that they were completely taken off guard by the crisis. Three-quarters of those surveyed said that they would reduce spending in response to any shortfalls in their retirement savings. Half of the respondents said they would save more and almost that many admitted that they might have to work longer before retirement.

Vanguard reported that, in 2008, 401K participants reduced their equity positions from 73% to 61% but that only 2% of participants had sold all their equities.

Job Loss

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Since the start of the current recession, the cumulative job loss is 8 million, a staggering figure when compared to past recessions. The 1981 – 82 recession was severe and has often served as a benchmark during the progress of this recession but the total job loss was less than 3 million.

In a 10/17/09 WSJ article, Sara Murray focuses both on the job loss of recessions in the past forty years and the recovery periods, the time it took to regain those lost jobs after the recession ended. The 2001 recession lost almost as many jobs as the 1981 – 82 recession but took a painfully long 47 months to regain the lost jobs. This recession has lost three times as many jobs as the 2001 recession and we are still counting job loss every month.

Consumer spending accounts for more than two-thirds of GDP in this country. Unemployment affects not only the unemployed but those with jobs who become more cautious in their purchases, fearing that they might be next. Those who have been betting on a swift recovery are likely to be disappointed.

Portfolio Strategy

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The conventional wisdom has been that, over any 20 year period, stock returns will beat bonds and other fixed income investments. For the past 80 years, returns on stocks have been greater than bonds. But, for the past 20 years, bonds have outperfomed stocks. If someone had retired 20 years ago, needing to live off the returns on a portfolio invested mostly in stocks, they would have had a difficult time.

SimpleStockInvesting has historical returns and charts, both actual and inflation adjusted, of the S&P500. A look at the chart of the inflation adjusted price of the S&P 500 (3rd chart) provides a sobering reminder that stock prices may just barely keep up with inflation. If an investor had bought the S&P 500 in 1965 and sold 27 years later in 1992, his inflation adjusted price would have been the same.

A 25 year old investor can use the 80 year history of the stock market as a guideline. The 50 or 60 year old investor doesn’t have that luxury and is more concerned with the volatility of an investment. Balancing both return and volatility is a difficult task.

Let’s look at another investment – gold. Gold prices have been rising this decade and the London fix price per ounce hit an all time high of $1060 this past week. So, is gold a good long term hold? In January 1985, gold had fallen to $300 an ounce. Let’s say an investor had bought at that price. Adjusting for inflation puts the cost at $750. In the past 25 years, you would have made 1.25% more than inflation. But what if you had needed the money in 2007? You would have broken even after 25 years.

You can solve the problem of volatility by keeping your savings in money market funds or short term Treasuries but the return often doesn’t keep up with inflation.

Several decades ago, Harry Browne and a few colleagues came up with a balanced strategy, the Permanent Portfolio, that they thought would give an investor returns that would beat inflation but would not be volatile. You can read about the history here and a 36 year history of returns using his strategy here.

Budget Aneurysm

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In mid 2008, the Office of Management and Budget (OMB) under President Bush estimated a $400B total deficit for fiscal year 2008, ending in Sept. 2008, and a deficit of $450B for the 2009 fiscal year.

In Dec. 2008, after the financial implosion of Sept. 2008, the non-partisan Congressional Budget Office (CBO) estimated that the total deficit would be about $1T. In Jan. 2009, before the new President was sworn in, the CBO revised their deficit projections upward to $1.2T, or 8.9% of GDP.

The 2009 fiscal year just ended Sept. 30th and the CBO announced this week that the actual deficit numbers will probably come in at $1.4T, or 9.9% of GDP. For a historical look at the budget numbers since 1968, click on Historical Budget Data at the CBO site. There you will see trends, like the defense spending trend shown in Table F-8. Although President Bush has been vilified by some for his military spending, he has spent less than his Dad did, and about 2/3 as much as President Reagan on defense as a percentage of GDP.

Since this data is in spreadsheet form, you can play with it. In dollars, personal income tax revenues almost doubled and Social Security taxes more than doubled during Reagan’s tenure. What were income tax revenues as a percentage of GDP? Go to the table with GDP figures, copy those figures into the table with income tax revenues and run a column of percentages. Bet you never had this much fun since you and Lindy Lou went to the lake in high school.

Can’t sleep at night because you are wondering what the size of the total public debt is? No problem. The Treasury updates the public debt daily.

Health Care Right

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For some Americans, there is a question fundamental to the debate on health care insurance reform: is health care insurance a right or a privilege? Taking apart the question, the central debate is whether health care itself is a right or privilege.

In 1986, Congress passed the Emergency Medical Treatment and Active Labor Act (EMTALA), requiring hospitals to treat those in need of emergency care. The law, and subsequent amendments, established some universal access for urgent health care. What the law left out was any provision for paying for the care received and about half of emergency room care goes unpaid. The debate over reform involves two issues.

The first is does a person have a right to health care? Legislation and both state and federal court cases ensure that prisoners have a right to adequate medical care. In 2002, a heart transplant for a California inmate prompted a contentious debate over the meaning of “adequate.” If you are a taxpayer who pays to maintain the prisoner, however, you may or may not have a right to health care. It depends on your condition, which has to be assessed by a doctor using a number of guidelines, both local and federal, to determine if you have an EMC, or Emergency Medical Condition. If you do have an EMC, you have a right to health care. That doesn’t mean you have a right to free health care. You’ll have to figure that one out on your own or with the help of a counselor at the hospital.

Among Americans who are not lawyers, the debate often turns on this constitutional and philosophical debate: does a person have a right to health care? Some say that the Declaration of Independence clause citing a right to life and the 5th Amendment protection of life gives one a right to health care. Some argue that these constitutional provisions include only life or death care. People see it one way or another and there is a tall fence between the two camps.

The second debate is partially founded on the first. If someone has a right to health care, does that imply that the government then has an obligation to provide that care at no cost? Some argue yes, some argue no and there is a big wall between these opposing groups.

As a comparison, let’s review a few other rights. The citizens of this country have a right to the protection of life and liberty. Government, then, has an obligation to provide for armies, police and courts to sustain that right of its citizens. Likewise, if health care is a right, shouldn’t that also be provided by government? Some who argue that health care is a right, could also argue that there is a differentiation of rights. Defense is provided to all citizens whether they pay taxes or not. The 2nd amendment gives one the right to own a gun but the government has no obligation to buy any citizen a gun. If health care is a right, is it a right similar to that of owning a gun?

Some argue that there is no right to health care, be it life or death. For those people, the case is closed on both the health care and health care insurance debate. I heard one older man say that when he was growing up, if you didn’t have money for a doctor, you died and that was how it was and everyone got along the way it was.

For some pragmatic Americans, the debate over rights to health care is stupid. There are two camps here as well, some arguing that unhealthy people spread disease and inevitably are a burden to those around them so we, as a community, have to find a way to provide health care to everyone. Some object that simply paying the additional taxes required to provide that health care will make us all more unhealthy, thereby exacerbating the condition we hoped to cure.

In this debate, which camp are you in?

For a look at some of the gripes about the existing health care insurance situation, read a few
real life stories

Health Insurance Reform

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In a 9/26/09 WSJ article, Janet Adamy breaks down the health care bill that is working its way through the Senate Finance Committee. It will probably be the core of final legislation. Here’s the short and sweet:

Income: Family of four making less than $22K per year, no more than 2% of income for health insurance premiums through state run exchanges. Subsidy decreases with income with a cap of $88K for a family of four, who would pay no more than 12% of income on premiums. Credits not available till 2013.

Individual Mandate: Fines as high as $1900.

Pre-existing Conditions: Can buy plans through high risk pools till 2013.

Young people: Low cost catastrophic and preventive care policy available for those less than 25 years old.

Insurance Companies: Can’t drop people when they get sick. Limits on extra premium charges for age, family size and smoking.

“Cadillac” plans: New taxes on insurers for individual plans more than $8K, family plans more than $21K. Retirees and employees with high risk jobs will be exempt. Insurer will no doubt pass tax on to employers who will pass it on to employees or simply stop offering the plans.

Medicare: No charge for preventative services. New discounts on drugs to offset the so called “doughnut hole” gap in Medicare D coverage. Competitive bidding by insurers for Medicare Advantage programs.

Employers, Large: More uniform insurance packages throughout the states – a plus for large employers. Companies with more than 50 employees pay a fine of $400 if they don’t provide employees with affordable health insurance. Size of fine and other provisions regarding flexible spending accounts may change in future versions.

Employers, Small: Provide at least half the cost of employee’s premiums. Tax credits. State run insurance pools.

Doctors: Conflict of interest rules so that doctors could not refer patients to hospitals that they owned. Comparison reports on doctors’ use of medical resources. Those in the bottom 10% of their category would get lower payments from government programs like Medicare.

Hospitals: Bill patients with no insurance at the same rates as they bill those with insurance as long as the patients qualify for financial assistance. No overly aggressive collections on past due bills.