Saturday, March 14, 2009

China Worries

Fool Me Once, Shame on You, Fool Me Twice… China Worries

“I’m a little worried…,” Wen Jiaboa, Chinese Premier.

This week, much attention has been directed to the fate of Bernie Madoff, the former NASDAQ exchange director who pulled off the biggest Ponzi scheme in history, defrauding investors of at least $50 billion. But let’s face it, there is still a bigger ponzi scheme in the making and China is now fearful that it will be left holding the bag! As US President Barack Obama continues to spend trying to stimulate the economy and implement his social welfare programs, major investors are only now starting to worry about the “credit worthiness” of the US.

China has reportedly already lost more than $5 billion in other US investments and as of the end of 2008, had become the largest lender to the US owning more than $696 billion in US Treasury securities. Reportedly, China’s investment in US Treasuries is losing 2.7% this year and even the mention of their concern impacted the bond market this week. China wants “guarantees” of their investments and pressed US authorities to manage their financial affairs appropriately.

But as a heavy supply of debt continues to flow into the market, how can high bond prices be sustained? How can we circumvent the basic laws of supply and demand? President Obama tried to assure the Chinese by pledging that the US deficit will be cut in half in four years…

China is stuck. It cannot sell the bonds as even the mere thought of this idea will surely send the bond market plunging (resulting in losses to them). They have no choice but to continue to invest heavily in bonds to keep the market afloat. What else supports the US bonds? Only the government’s ability to tax. Ouch.

At the Heart of Financial Planning

Recently, when asked what I do and I responded that I am a financial planner, the response was, “oh, one of those!” But the truth is, a real financial planner can be more valuable to you now, more than ever. I chuckle each time I see the typical “scare tactics” emerging from the right on how small businesses are going to get hurt due to President Obama’s new tax ideas. People who believe this have obviously never worked with a competent financial planner.

A true, fee-only, financial planner is not going to be selling you investments, insurance or other products, the financial planner is going to review you situation to see if your other advisers are providing competent service that is appropriate to your needs. And most importantly, a good financial planner is going to have a strong command of the tax laws so that you can find ways to manage your taxes more efficiently. Let me make it clear, most financial planners are not CPAs and do not provide tax advice per se. But they should have the expertise to be able to review your taxes and point out strategies that will enable you to reduce and/or defer taxes and possibly eliminate future taxes.

Republican Criticisms
Grassley said Obama's budget proposal to raise taxes, starting in 2011, on individuals earning more than $200,000 and on households earning more than $250,000 will hurt small businesses.
"These small businesses happen to create 74 percent of all new private sector jobs in the United States," Grassley said. "Tell these business owners their taxes will go up. Odds are, they'll cut spending. They'll cancel orders for new equipment, cut health insurance for their employees, stop hiring, and lay people off."
They’ll cut spending. Why??? Seems that all of the business owners that I know spend lavishly on entertainment, travel and other business-related activites so that they won’t have to pay taxes. Being a business owner is a lifestyle, at least being a successful, tax-efficient business owner is.
2. Cancel orders for new equipment. I admit that I don’t know if the rules for depreciation and amortization have been repealed, but business owners and rental property owners strive to take maximum use of such deductions. In 2008, business owners were allowed to immediately expense certain pieces of equipment up to $250,000 (higher limits apply in some cases). You can even write off up to $25,000 on your new SUV! I doubt seriously if such deductions will be changed.
3. How sad that a small business owner who has net income in excess of $250,000 would lay off people and/or cut their health insurance. At some point, business owners need to understand that they have a social responsibility. If you are clearing $500K a year and not taking care of your employees, then you probably should be paying higher taxes. Why should the rest of society be picking up the tab for healthcare for these people when you fully have the resources to provide for them?
4. Tax deferrals through Retirement Plans, Welfare Benefit Plans, Profit Sharing Plans, Volutary Employee Benefit Plans,… on and on and on. The tax planning strategies for business owners go on and on. If you are paying too much tax, then you absolutely need to work with a financial planner. While you may balk at the fee you need to pay, a good financial planner should be able to immediately look at your situation and show you many ways to save money. These savings should far exceed the fee you are paying.
My Last Concern

The stock market bounced nicely from oversold conditions this week. The market was due for a bounce. Whenever a stock price breaks above or below a major level of support or resistance, it will normally try to come back to that level. I had identified the 7,500-7,600 level on the Dow average as a major support level so for the market to rally back to this level would not be a surprise. Be aware of this market level and be prepared to either improve your current portfolio here (closing out unwanted longs, adding diversification to protect you against any future downside, etc.).

What concerns me the most here is the news that appears to be driving this market move. First of all, as I mentioned previously, I do believe that the market wants to see a resolution to all of the wrong-doing that has been going on. No doubt, Bernie Madoff going to jail was a happy moment for many. Hopefully many more crooks will be identified and jailed but we here at Trendsetter won’t hold our breath.

Other news that sparked the markets was key banks reporting that the are operating profitably. But what does this really mean? Certainly with the billions of dollars that the government has provided them and considering that they aren’t lending out this money, only the biggest spendthrifts would not be profitable. We already caught one spending millions redecorating his office. So lavious expenses are being held in check.

At the end of the quarter though, when banks come out with earnings, sure, they will say that operating expenses were low and that they would be profitable without the massive writeoffs that they may need to take. It’s not that the banks have not been able to run the day-to-day business profitably, the problem is that they made huge, risky bets and shifted lots of it off of their balance sheets. Still, we don’t know how to value these bets since there is no market for it. Well, let me clarify, there is a market but the banks are not willing to recognize the losses.


In their infinite wisdom is again trying to tinker with the market.
Banks want to get rid of mark-to-market while investors and regulators want to keep it. How else can we have any clue what a company is worth? Already investor information is scarce. Public information is reported on a consolidated basis and true fundamental analysis is impossible. Plus, financial information is managed and accounting gimmicks prevent investors from seeing reality. If this were not true, how did we ever get to our current situation? How can investment analysts continue to earn their millions on Wall Street and have missed what was happening?

Already, the government allowed the banks to leverage up to levels way beyond their capacity for risk management. They further extended their exposure by creating derivative products that even the chairman of the Federal Reserve admitted he can’t figure out. And now the banks want us to value these items at full value?????? Avoid bank stocks unless you just like the action.


Our diversified 2009, $100,000 portfolio closed the week with a value of $102,475. Our cash reserve still remains at a little more than $43,000 Our most recent recommenation of Kohls Department Store closed at 38.22 on Friday. We purchased it at the open on the Monday, March 2, following our recommendation at $34.80.

10-Year Note Futures Options

Our Treasury Note option trading won more than 3% on each $10,000 unit this week. Note that the April 124 call position is still open and marked-to-market at Friday’s close.

As the stock market increases, bond and note rates have been rising. We expect volatility however to remain confined between the two trend lines noted on the chart above. The high point is 3.38% and the low point is 2.76%. While volatility diminishes, selling options enables one to reap generous short-term gains.

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