Friday, 28 June 2013

Moodys is Right On

Moodys released a report on state pension funds today that implied that such funds currently hold only 48 cents out of every dollar needed to properly fund their obligations.  Three cheers for Moodys!

For decades, state and local pension funds have released grossly misleading and inaccurate figures suggesting that they are better funded than is merited by the facts.  Politicians have acquiesced in this charade since it was inconvenient, to use Al Gore's phrase, to speak the truth.

The chief method of disguising the truth is to make over-optimistic assumptions about future asset returns and unrealistic assumptions about the contributions that will be forthcoming in the future.

Based upon false information, state and local governments have touted reforms that hardly make a dent in the real problems.  Virginia is a great example.  The so-called pension fund reforms enacted by the Virginia General Assembly and backed by Governor McDonnell were misleadingly hailed as a 'major' improvement in funding.  Nothing could be further from the truth.  By maintaining mostly a defined benefit system supported by optimistic and unrealistic assumptions, the Virginia reforms simply locked in concrete a failing system without any serious reform.

The only properly funded pension systems are defined contribution systems.  Period.  If you are a participant in a defined benefit system (social security is a good example), the best advice for you is to start saving as much as you can.  Your pension system is most likely in deep, deep trouble.

Thursday, 27 June 2013

GDP Revised Downward

Instead of 2.4 percent as originally advertised, the US GDP grew at a revised 1.8 percent during the first quarter of 2013.  Consumption spending fell off the cliff, which was unexpected.

So, the stock market rallied...big time.  Why?  Because the bad economic news suggested that the Fed might continue its bond purchases indefinitely.  "Long live QE3" was the rallying cry.

Meanwhile the President and his cronies were busily designing more strategies to lengthen unemployment lines: increase minimum wage, bury the coal industry, continue down the road on Obamacare, push for higher taxes, and stall the Keystone pipeline.

Nothing discourages this White House.  They will not likely be satisfied until unemployment gets back into double digit territory (so they can match their heroes in Europe) or until millions more Americans give up on working and move into disability or off into the black market.

On the ObamaCare front, the Administration is now recruiting Hollywood types and NFL superstars to begin a campaign to get young folks to sign up for ObamaCare health insurance, which will cost  the 18-25 set roughly twenty times the penalty for not signing up.  The premiums for young people are more then ten times what free market insurance would cost them.

There is some justice here, since young folks backed Obama's candidacy in overwhelming numbers.  Now, the young will find first hand what it is like to pay to subsidize others.  Don't expect the young to buy in.  Coffee house conversation is one thing; actually paying for ObamaCare is another.  They will not buy in.

Without the youth 'buy-in,' the ObamaCare numbers don't work.  But that's okay one supposes, since the so-called insurance exchanges mandated by the law are not in existence anyway.  ObamaCare is mostly an idea -- a terrible idea.  No one knows what the reality will be because no one in the Obama administration is doing anything significant toward implementation.  All of this will slam into the economy as the year progresses.

Between the coming of ObamaCare, higher taxes, the war on the coal industry, and the push for higher minimum wages, don't expect much improvement in the economy.  Even housing is going to struggle with the new regulatory environment which makes it border-line criminal for a bank to make a mortgage loan to someone who needs a mortgage loan.  Not to mention higher mortgage rates, which zoomed up from 3.7 percent to over 4.5 percent just in the last thirty days.

Meanwhile the stock market moves higher.

Wednesday, 26 June 2013

Unilateral Energy Disarmament

As the rest of the world gears up to massively increase their carbon footprint, Obama is moving to put the US out of the coal business.  That won't keep worldwide coal production from soaring.  It just takes the US out of the coal business.  Obama has made no effort at all to get global partners to sign on board.  Instead, the US is walking this plank all alone.

This is in keeping with the Obama strategy of strangling the US economy to gain accolades from the Harvard coffee houses.

Once again, American workers will bear the brunt of the Obama agenda.  It is not enough to have the worst economic recovery on historical record (at least since 1850).  Now, with Obamacare on the horizon, Obama provides one more nail to the coffin of American prosperity with his arbitrary EPA war on the American worker and energy user.

The route to third world status is paved with good intentions and truckloads of hubris.

Tuesday, 25 June 2013

Why Employment Problems Aren't Going Away

Suppose you had a business that would improve revenues by $ 60,000 per year if only you could add one additional employee.  Should you add that employee?

That depends upon what the employee costs.  It does not depend upon what you pay that employee.  Is there a disconnect here?

Yes.  What an employee costs in modern America is a far, far greater number that what an employer might pay that employee.

If you hire an employee these days, the costs, beyond salary, are enormous.  In some states these extra costs can make the overall costs nearly double the wage or salary that the employee is paid (before tax).  Why?

You can begin with social security taxes, medicare taxes and workmen's compensation.  If the company offers a health care insurance plan, you can add that in.  Under ObamaCare, you must add something in for health care insurance. 

What about complying with various federal rules?  OSHA?  Disability Laws?

What about potential lawsuits for "protected" employees?  If you hire females, minorities or anyone over the age of 50, you must reserve or insure against lawsuits (regardless of whether you are likely to win or lose such lawsuits).  Just defending yourself is expensive.  Often the litigation involves activities that take place between employees away from work and during non-work hours.  That is how absurd the "protections" are for employees.  But, the point is, they are costly to the employer.

Imagine that the employee who can help you increase your revenues by $ 60,000 per year requires a salary of $ 45,000 per year.  Whether you hire that employee will depend upon all of these other costs that whittle away the $ 15,000 margin of profit.  If your business is located in California or New York, the "extra costs" typically exceed $ 25,000 per employee.  At $ 25,000 in extra costs, the total costs to an employer become $ 70,000.

Would you pay $ 70,000 to add an employee that could increase your revenues by $ 60,000?

It's worth noting that the "extra costs" are relatively less for highly paid and highly skilled employees, which explains what so many high income Americans don't care if low income employees are priced out of the market by these extra costs.  Greenwich, Connecticut votes left.  For good reason,  Practically no one who resides in Greenwich is priced out of the labor market by these "extra costs."

The losers in this story are the lower skilled employees, the minorities, the single moms and older workers.  These policies that encourage lawsuits and saddle employers with health care costs, retirement costs, unemployment costs and the like dramatically reduce the employment prospects of "protected" employees.

No wonder employment is growing at the slowest rate in American history during a period of economic recovery.  Don't expect things to get much better.  This is a micro problem, not a macro problem.

Monday, 24 June 2013

Elizabeth Warren and the Minimum Wage

The newest Senator from Massachusetts is Harvard faculty member -- a native American according to her resume (as opposed to her true heritage) -- Elizabeth Warren.  Her main claim to fame is villifying Wall Streeters for lining their pockets, a practice she seems especially adept at.  No wonder she notices it in others.

Senator Warren was singing the praises of the minimum wage last week during Senate hearings.  According to Senator Warren, increasing the minimum wage actually increases jobs.  Employers, I presume, get excited, knowing that employees now cost more than before and therefore expand their hiring.  I guess that's Senator Warren's logic, since she didn't offer any logic during the hearing.

Using Senator Warren's logic, I propose we cut to the chase.  Increase the minimum wage to $ 1,000 per hour.  That way, it will impact fat cats like Senator Warren, not just minorities and high school graduates. 

People like Senator Warren have a noblesse oblige approach to the unemployed.  Let them eat cake (or better yet, raise the minimum wage).

Employers really are a silly lot if the they behave as Senator Warren thinks they behave.  Wonder why they didn't think of raising wages themselves so that they can then offer more jobs?

Warren's absurd statements should be good fodder for a comedy show not a Senate hearing.

Understanding US Treasury & Yields


Just when the whole world coming for a rout, only US treasury yields shoot up to multi-months high. Investors might wondering why this happen. Some of our readers are posting these kind of question to us. We think this article might helps.


US Treasury = US Government Bond

Actually, we are referring to US Government 10 Years Bond. Generally, a government bond is issued by a national government (in this case US) and is denominated in the country's own currency (USD). Bonds issued by national government in foreign currencies are normally referred to as sovereign bonds. The yield required by investors to loan funds to governments reflects inflation expectations and the likelihood that the debt will be repaid.

Also, government bonds were usually referred to as risk-free bonds, because governments could easily devalue their currencies or raise taxes to redeem the bond at maturity. 



The Story of US Treasury Yields...
Just like Base-Lending-Rate (BLR) for Malaysia, everything from mortgages to corporate loans in US depends on US treasury yields. Higher yields mean higher borrowing costs. To stimulate the US economy, Federal Reserve had came out with various Quantitative Easing (QE) actions to bring down the said yields, allowing borrowers access to cheap funding. How to bring down yields? Federal Reserve will buy back US treasuries, thus, flooding the market with money. The side effect was a weakening USD.



However, all things will change 360 degree, if Federal Reserve start to slow down or totally stop their so called QE3. This is what happening now, creating uncertainties to global markets.

Wednesday, 19 June 2013

"Our Work Is Not Yet Done"


So said President Obama speaking in Berlin earlier today.  The president referenced unemployment and poverty as items left undone.

What the president meant, of course, is there is more for big government to do.

It was appropriate that the president's venue was Europe.  Europe, by policy, has ruled out any hope of full employment or prosperity.  Creating 'justice' and 'fairness' in the labor market has meant that, for European youth, there is no economic future.

Unemployment is above 12 percent, on average, across the Eurozone and over 25 percent in the hardest hit areas.  Youth employment (18-25) is rarely below 25 percent even in the best of times in Europe.  This is the new European reality.  The Eurozone GDP has been mired in recession for more than two years and there is little prospect for the European recession to end.

America is learning the European way.  The unemployment rate in the US is kept below double digits only by the fact that millions of Americans now consider their own job prospects so hopeless that they have given up looking for a job.  That means that millions of Americans are no longer counted in the unemployment data. 

US GDP is growing almost imperceptibly.  That is not likely to continue with the Fed finally reversing course on bond purchases and the looming implementation of Obamacare.

So, what is left for government to do?

If markets were free, Europe would have an unemployment rate below 5 percent, as would the US.  Economic growth would exceed four percent in both Europe and the US.  But free markets are frowned on by policy makers and their admiring press.

But, Obama sees more to do.  Not a good omen for those looking to the future.

Monday, 17 June 2013

The Rise of Financial Planner


As promised, Finance Malaysia blog would like to educate public at large on the importance of personal financial planning, after knowing that most Malaysians falls into debt traps because of this poor financial planning. After finding out, we're surprised that actually not many of us knowing this NEW distribution channel in financial markets --- Financial Planner.



The NEW Alternative...

Traditionally, when we sourced for financial products or services, we normally go to either agent or bank. Example, for life insurance or unit trust, we buy from life insurance agent or unit trust consultant or banker.

This trend continues few years back, when Securities Commission of Malaysia and Bank Negara Malaysia comes out a framework or guidelines introducing financial planning industry. Then, financial planning firms emerge, until only recently some of us would have heard about its existence in the market place. Of course, financial planners came into picture too.

Role of a Financial Planner?
By definition, a financial planner is a practicing professional who covers the whole process of financial planning including cash flow management, education planning, risk management, investment planning, retirement planning, estate planning, tax planning and business succession planning (for business owners). The key defining aspect of what the financial planner does is that he/she considers all questions, information and advice as it impacts the financial situation of client. 

Highly Regulated?
In Malaysia, the term 'financial planner' was regulated and legislation requires a person to be licensed before he/she can hold himself/herself out as a 'financial planner'. Authorities view financial planner as a professional and should be differentiate it from the rest of financial practitioners. Just as the title 'Dr' only for Doctor or doctorate graduates, and 'Ir' for qualified professional engineers to instill the confidence of public based on titles.

It's an offence to call on yourself as financial planner or practicing financial planning for clients, without license in Malaysia. Those who found commits such offence, on conviction, be liable to a fine not exceeding RM5mil or to imprisonment not exceeding 5 years term or to both. Wow... Considered as a serious offence.

Even said so, many insurance agents or unit trust consultants commits the offence without realizing it. So, please tell your insurance agent or unit trust consultants whom you love or care about.

This article was contributed by Alex Yeoh, a licensed financial planner with a reputable financial planning firm. Finance Malaysia blog will work together with Alex in bringing more interesting articles on personal financial planning. For more info, you may reach him via email alexyeoh@vka.com.my

Friday, 14 June 2013

Why so FEAR if US Federal Reserve stop QE ?

Global shares tumbles to multi-months low, especially in Asia whom did well year-to-date thanks to Japan's Abenomics. Commodities and gold also can't spare from the bearish sentiment across investment markets. Reason? US Federal Reserve may stop/scaling down their bond-purchase program. Huh!!!


Is this the real reason?
Like what I always said, analysts always give a reason for whatever bull or bear markets (after it had happen). For me, the main reason was (again) profit-taking activities took place in view of the good performances during first half of this year.


How about Federal Reserve's QE ?
It's funny to blame Federal Reserve for the corrections. First, why Fed want to stop QE at the first place? It's because US economy is recovering well. Wasn't this a good news to global markets? Definitely. Then, why we're so fear if Fed stop QE ? Doesn't make sense, right?


Anyway, like what I said, the real reason was profit-taking activities which is normal after a good run-up. Current stage must took place before the market can move higher. Good for investors. Good for you. Good luck.

Friday, 7 June 2013

Crummy Numbers - Big Rally

As expected, the economy continues to limp along.  The jobs report this morning showed 175,000 new jobs.  With net downward revisions for the prior months, the number was barely above the 150 K mark.  The result -- 7.6 percent unemployment unchanged.  Five years after the bottom, still a pitiful recovery.  But, that's good news for Wall Street because it suggests that expansive liqudity provision by the Federal Reserve will remain the policy.

For a while, higher stock prices will paper over the continued stagnation of the American economy.  But those looking for jobs and wage gains have all but given up hope in this tepid recovery.  The economy figures to soon be body slammed by Obamacare, so don't expect a healthy economy for quite a while.

Hoping for Bad Economic Numbers

World stock markets appear to be hoping for a bad employment number this morning.  Why?  They want Bernanke to continue QE3.  That's why.  Global markets reflect the new wave:  hope for bad economic news and expect a bailout.  This mentality encourages homeowners to borrow more than they could ever afford to pay back.  Student borrowers are encouraged to do the same.  Gaming the system by behaving economically foolish pays off because of the expectation that the government will step in.  At the end of the day, that is what Obamacare is all about as well.

In the bad old days, we expected free markets and incentives to fuel economic growth to raise living standards.  That is no longer the plan.  Now, it is all about slicing up the pie, while the pie no longer grows.  The taxpayer is assumed to have endless resources.  A bad assumption.

The 'entitlement mentality' has permeated every level of society and has infected global equity markets as well. 

Those who are hoping for bad economic numbers will likely get their wish.

Wednesday, 5 June 2013

The Equity Risk Premium Puzzle

One of the more interesting, yet to be explained, facts in finance is the fact that common stocks perform so well, as compared to less risky assets.  Treasury bills are earning almost nothing these days, but stocks are on a tear.  Why?

The same pattern has held historically.  The gap between what stocks earn and what much safer assets earn has been much, much bigger than could possibly be explained by aversion to risk.  Something more is afoot.

The question is front and center today.  Usually the question is posed as: "why are short term rates near zero, but other assets -- stocks, housing, e.g. -- doing so well.  Why don't people simply shift from treasuries to stocks and housing?"  Apparently folks are doing just that, but not by enough to narrow the return gap.

You could argue that there is not enough investment by ordinary folks in stocks.  That means that stock prices never get quite high enough to deflate their long run return prospects.  But, what about housing?  It is hard to believe that a similar argument would apply to housing.

I'm no fan of the equity market these days (I became bearish at 1391 in the S&P and the market is 15 percent higher than that today).  But, long run, you can't beat equities.  You just have to somehow ride through the rough patches, which may lie just ahead.

Tuesday, 4 June 2013

Bad News is Good News

Stock markets rallied yesterday upon learning that US factory activity plunged to new lows.  The factory activity index reached a low of 49, where anything below 50 is considered a sign of economic contraction.  Three cheers!  Weak economic news means the Fed will continue its QE3 purchases of more than $ 80 billion of debt each month.

Stock market mavens no longer hope for good economic news.  That seems an unlikely prospect.  Instead weakness suggests more aggressive Fed activity, so market prognosticators stay tuned in to see how bad it can get.  The more the economy worsens the better.

Maybe the Obama Administration is long the stock market.  If so, that might explain policies that seem designed to prevent the economy from what should have been a strong economic recovery.

So, instead of jobs and economic growth, we get higher stock prices.  At least for a while.

Monday, 3 June 2013

New Fund: AmIncome Flexi 3 Bond Fund

Following the success of the 1st and 2nd tranches of AmIncome Flexi, which were launched on Sept 18 and Dec 12 last year, with Rm100mil and Rm250mil in asset under management respectively, AmInvest once again would like to satisfy investors appetite.


"Given ample liquidity from the various central bank easing measures, the bond market is expected to be well supported in 2013". The 3 year closed-ended fund, targeted at investors seeking regular income and potentially higher returns than fixed deposits but with lower risk than equities.


How to do that?
To achieve the investment objective, the fund intends to invest its NAV in a portfolio of domestic and/or foreign sovereign issued bonds and corporate bonds, with minimum 'A' credit rating. The manager will purchase bonds which will generally have shorter or same maturity to the fund's maturity. The fund employs a flexible investment strategy as follows:-


  1. Will not actively adopt a trading strategy unless there are decrease or expected decrease in interest rates resulting in an increase of bond price, for the purpose of maximizing returns of the fund over 3 years;
  2. May at its discretion dispose off a bond to mitigate currency risk for the benefit of the fund;
  3. May also opt to dispose off a bond when it has achieved at least 15% cumulative return before its maturity, and return the proceeds of the bond to investors;
  4. May liquidate the particular bond affected in the event of a credit downgrade if the manager at its discretion feels that there is a likelihood of credit default. The bond's sale proceeds may be reinvested in fixed deposits, money market instruments and/or other bonds;
  5. May use derivatives for currency hedging purpose, for investment in foreign currencies denominated bonds.

For more info: