Tuesday, November 29, 2011

US Bank Stress Test

The Fed wants to find out if our major banks can survive a significant down turn in the US economy,

Wednesday, October 26, 2011

Limit orders limit risk

 Click on the link below to see how to use limit orders can make you a smarter and more successful investor.

Dan Perkins

Tuesday, October 4, 2011

The quarter is over but the new one started of ugly

In this video blog I talk about the last 90 days and the possibility of a bear market. We went into today's with the S&P 500 down 19.4% from the high in April and down almost 14% for the year.

I want to thank all of you who have commented that you really like the video blog. I have to tell you I was surprised at all the positive reaction. I will continue to work on improving the production value to try and make it the best I can for you. Click on the link below or copy and paste it in you browser.

Dan Perkins

Sunday, September 25, 2011

A very difficult two days

Wednesday and Thursday this past week were in one word scary, In the new better quality video blog I talk about the causes and what is likely to happen as a result of this significant sell-off.

Highlight the link and use your cursor to "open the link"

Dan Perkins


Two Stocks added

This is my first video Blog. In it I will discuss two new additions to our portfolio Bank of New York Mellon and Clean Energy. The reaction to this first video blog was very surprising to me. I found more people either wrote or called to tell me how much they enjoyed and that listening made it easier. I'm still new at this and I want to improve the quality of the work so come watch and see if I grow.  To watch this video highlight with your curser and click on "open link" to view it.


Dan Perkins

Sunday, September 11, 2011

Dangerous Assumptions

The hype in advance of the President’s speech to Congress and the nation Thursday was that the president had a proposal to solve unemployment and fix the slowed economy. I have some real concerns about the speech and the assumptions that were made by the President and supported by news pundits. The press intimated that the president was proposing a suspension of the payroll tax for the next 12 months when in fact it would only be halved for 12 months.

Another assumption is that payroll tax savings will put money in people’s pockets which they will spend and that, in turn, will create jobs because demand will make companies hire to meet the increased demand. Let me offer an alternative thought as to what might happen to the non-stimulus money estimated to be between $1,000 and $2,000.

No doubt some will spend the $1000 right away as the president suggests. It is important to point out that the $1,000 will not be paid in one lump sum, but over the employee pay periods. If a person is paid every two weeks then the savings through the reduced payroll tax is about $38 dollars each for the employer and employee. Let’s say that the savings is twice that amount $2,000 so that every two weeks you have $76. 

I think people are concerned about their job and their bills. Their retirement account values have declined and the interest rates on savings is close to zero. Many people will, out of fear and uncertainty, put this money in the bank to try and save it to protect themselves and their families for as long as they can.  Many Americans have depleted their savings and even though the interest rates are close to zero they will feel better with some money in the bank. I think the great spending spree to jump start the economy will not happen.

The employer will have a reduced payroll tax for one year. By the way, calling it “payroll tax” really means, or is code for, “social security taxes”. The President doesn't want to be linked to any changes in social security so that is why he doesn't refer to this as social security. Another example of this word game is calling tax increases revenue enhancements as to what it really is a tax increase.

There is a one-time tax credit for hiring a long-term unemployed or a returning vet. These changes are for one year only. Most businesses, large and small, don’t make decisions based on one year. One of the big problems causing businesses to be reluctant to hire people is that they do not feel that they know what is going to happen in terms of rules, regulations and cost for existing much less future employees. The bureaucrats in Washington have not yet developed the rules for new laws so businesses don’t know how the new rules will affect them. Until businesses feel comfortable that they can depend on stability of how they operate their business they will not hire people to try and expand.

Again, payroll tax is code for social security taxes. The President is suggesting that we extend the reduced contributions for every American earning salary and wages for another 12 months. For two years we will, if it passes, underfunded social security, a program that most everyone agrees is in trouble of running out of money. I guess if you call it something different, that is “payroll tax” instead of “social security tax”, you don’t have to deal with the new problem under funding creates.

It is proposed, for the second time in two years, that teachers, police, and fireman receive money from the Federal government to save their jobs. Does it seem strange to you that all of the people who are going to get paid to keep their jobs are members of a union. We pay our taxes on a state and local basis to pay for teachers, police, and firemen and we would now be paying again out of our Federal tax dollars to keep them employed.

At the end of 2010 state and local governments employed over 16.6 million full time equivalents. In 2010, a mere 200,000 state and local workers lost their jobs. I'm not saying the the loss of a job can be devastating, it can but the public sector employees have not experienced the pain the rest of the country has over the last three years. We’re trying to protect their jobs, but what about the rest of the unemployed? Right the president wants to extend unemployment benefits to 99 weeks. Who do you think will make more money the teacher who's full pay is saved or the construction worker that has to try and live and support his or her family on unemployment?

Lastly, how do we pay for the $450 billion in the non-stimulus jobs bill that the President wants Congress to pass now?  The bill has not been written yet so perhaps we should think the way the former speaker of the house Nancy Pelosi felt about the healthcare bill, “we have to pass it to find out what is in it.”

Dan Perkins

Thursday, September 1, 2011

Investment Guaranteed to Pay Zero for the Next 3 Years. Want It?

For most of the last three years, the rate of interest in money market mutual funds has been zero, especially US Government Money Market Funds. Fund managers and investors were hanging on, thinking that the Federal Reserve would start raising interest rates and make money market mutual funds viable once again. Most people who own these funds do not know of a provision granted to fund managers by the SEC. This provision is called the “claw back” provision. The benefit to the fund companies is that when the funds reach the point that the yield is greater than the cost to run the fund, the managers who have been waiving their management fees can start collecting fees for the most recent three years.

I have been saying that we are in a Japan-style recover, in that we have low growth, high unemployment and, most devastating of all, especially to seniors, low to zero interest. Until two weeks ago, hope still abounded that the Fed would increase interest rates soon. The Chairman of the Federal Reserve said, in no uncertain terms, that the Fed would keep interest rates at the current level until at least the 2nd quarter of 2013, two years from now.  By the end of that week, Merrill Lynch said that they thought it will be, “at least 2014.”

If you have money in a money market mutual fund, you can expect to earn zero return for the next two to three years if you stay in the fund. If you have been in the fund since the end of the third quarter of 2008, your return has been zero. If you stay and Merrill is right, you will be looking at 6 years of zero return, guaranteed.

Many say, “At least I will not be losing money.” Au contraire.  Just look at the chart below of the CPI from the end of 2007 to July 2011. If you do the math, the loss in real value would have been 5% of your money to inflation. If you started 2008 with $10,000 in a US Government money market mutual fund, three years later you lost $500 of purchasing power. If, in fact, the Fed is on hold for two more years and you stay in the fund and inflation stays the same as it has been for the last 3 years, your loss in real dollar terms could approach $800. Yes, Virginia, there is a Santa Claus and you can’t lose money in a money market mutual funds are both myths rather than fact.
I have had clients contacting me asking for advice for friends and family who were living off the interest in money market funds and social security and who are now having to spend their assets to pay their bills because the fund pays no interest. My greatest fear for millions of Americans is that they are reaching the point that two to three more years of no return will be devastating to their lifestyle and the quality of life they will have going forward.

The banks have seen significant inflows of deposits because they are paying better interest rates than the money market funds. The banks find themselves flush with cash and are trying to discourage deposits by dropping interest rates. (Go to bankrate.com and look at the declines) Banks are taking it in much faster than they can loan it out. I know of one money center bank that said it,“Needs to reduce deposits by $2 billion.”

I realize that all of us need some money invested short-term, but not the amount that is currently invested in money funds. Those of you who are my clients know that the title of this blog is exactly how I manage money for them. Money has to be working for you all the time; your money has to be in motion. Earning zero percent on a money market mutual fund is not money in motion and when you adjust for inflation, you are really losing money.

I know that this blog gets circulated many times by the people I send it to. If you are a second-hand reader and need help or know of someone who needs help, send me an e-mail.

Dan Perkins

Monday, August 8, 2011

Have Politicians Closed the Barn Door After the Horse is Gone?

By now you have heard that S&P has downgraded the sovereign credit rating of the long-term debt of the United States from AAA to AA+. The markets, both stock and bond, will be sorting out the implications of this historic downgrade for some time.  I found it interesting that the administration challenged the accuracy of the number used by S&P to come to its conclusion. The administration and the Congress are in denial and that is not a river in Egypt. The administration wants to chastise S&P for their math when the Administration and the Congress can’t get the math right and hasn’t for decades.
S&P made it very clear that the Federal government has serious deficit problems and that the level of debt to GDP was beyond what they believed was acceptable for a  AAA credit rating.  S&P made it clear that we needed to reduce our deficit by at least $4 trillion in order to maintain the AAA credit rating.
Telling someone that they need to reduce their amount of debt to keep their house in order happens to all of us. If we go too much in debt our credit rating declines and we have to pay more if we want to borrow more. We can reach a point when we have borrowed so much that we can’t afford the payments and we default.  So, the players in the budget battle knew what they had to do and they flat out didn’t do it and S&P was forced to issue the downgrade. 

In one of my blogs during the deficit battle I said that we are not reducing the deficit. Both bills will add an additional $9 trillion to the national debt in 10 years instead of $10 trillion.  We didn’t cut the deficit we slightly reduced the speed of its growth. 

Now that the horse is out of the barn will anybody care about the downgrade? The US Government bond market is the largest and most liquid in the world. No other market can handle the volume that our markets can process on a daily basis.  Again, will anybody care? 

Most people in America have no idea what the downgrade means.  Over the next 12 months you can bet that the discussion of the size and cost of government will move up the ladder of importance right along with jobs. Look for the conservative right to blame the President because the downgrade came on his watch. He is responsible for 43% of the debt we have on the books. Congress is not without blame. They knew what it would take to save the credit rating and they failed to act.

I think one of the outcomes of the downgrade will be the cry from the voters to throw out both President and Congress in the 2012 election. If they forgot to lock the barn door they have to face the consequence of their actions. Let me point out that all the blame doesn’t rest with the president and the current Congress. Previous Congresses and Presidents are to blame for allowing the deficit to get out of control. While we can’t do anything about the past, we can do something about our grandchildrens future. The first thing that has to go is baseline budgeting. We can no longer allow the Federal government to raise the budget by 8% every year regardless of the income it receives. Baseline budgeting is causing us to borrow 40% of our yearly operating budget continually adding to the debt burden. The second thing we need to do is put in incentives for business to grow jobs. More people employed will mean more tax revenue to reduce the debt. 

We must get rid of our mountain of debt. Only by making us free from the burden of debt can we be free to be the best that we can be.

Dan Perkins

Wednesday, July 27, 2011

What Both Parties are not Telling Us About the Budget and the Deficit

Lets compare our home budget to the Federal Budget. Say our gross income is projected to be $100,000 which is subject to State and Federal income taxes; after which we have $70,000 to spend. Through the next 12 months, assuming we don’t have to replace the roof or the car, we have $70,000 to spend and that is it. We could take out a home equity loan and/or take our credit cards to the max but once we max out everything, if we can’t make the payments we have to file bankruptcy.

Now let’s look at what the Federal Government does under its “Baseline Budgeting.”  It starts off with the concept that its budget is based on an increase in annual spending of 7% regardless of the income the government receives.

The basic principle of how long it takes money to double is to divide 72 by the rate of return. If you earn 7% and divide 7% into 72 it will take just over 10 years to double your money.

The same principle applies to how long it will take the federal budget deficit to double. With Congress using a 7% increase as a baseline, the annual budget deficit will grow from $14 trillion this year to $28 trillion in 10 years. If we look at the deficit plans on the table, they are projecting a $1.2 to $2.4 trillion reduction over the next 10 years, if everything stays the same. If we take the higher savings of $2.4 and everybody keeps their promises the deficit will not be $28 trillion, but perhaps $26 trillion up from $14 trillion. Yes with $2.4 trillion in real budget cuts the deficit will just about double in 10 years, so how did we make any progress on the deficit?

These plans, which are reported to be budget cuts, are merely a reduction in the growth of the deficit. As I said in the July 6th Blog “You do the Math,” we are currently spending $1.4 trillion annually. If we take the $2.4 trillion over the next 10 years that will average $240 billion a year in reductions. That is only if Congress stays to its commitment to reduce $2.4 trillion. With a baseline budgeting process using the $1.4 trillion, a 7% increase the next year will add $98 billion more to the deficit this year.

Now lets go back to our home budget. How will you find the money to pay for the increases of 7% in your budget each year for the next 10 years if you have no credit left? The bottom line is, you can’t. Remember you read it hear, next year when you hear, that the budget deficit is higher than it is this year. I believe that Congress wants to keep us in the dark about the reality of what is going on in Washington.

I want you to call your Congressperson or Senator and ask him/her about “Baseline Budgeting” and see if he/she can tell you what it is and what the deficit will be next year.

Dan Perkins
Reference: http://www.patriotupdate.com/oldsite/stories/read/6503/Baseline-Budgeting-and-the-Cost-of-These-Non-Existent-Tax-Cuts-

Debt Crisis to Constitutional Crisis

Debt Crisis to Constitutional Crisis

On Monday I saw the video of a recent speech by the President to his base and I believe he sent up a trial balloon and he got a great response for his base, but nothing from Congress. He suggested that if we got down to the last minute and the Congress fails to act he might raise the debt ceiling on his own through the use of the Executive Order.

I will admit that he said this jokingly, but he said it I believe to test the waters and see what reaction he would get from the hill. To the best of my knowledge he got no reaction from either party. Perhaps both parties know of the speech and do not believe that the President would do such a thing. I do not believe that he said it if he wasn’t thinking about it and the possibility of the use of the Executive Order.

So, if we come down to August 2 and the President has nothing to sign from the Congress he may well sign and Executive Order to raise the debt ceiling on his own. My guess is that he would go on TV and tell the American people that he has been diligently working with the Congress to solve the debt problem and the Congress is so split that they will never pass a debt limit extension and so as President he is using his powers and is signing an Executive Order to raise the debt limit to prevent a default by America.

He fully understands that the constitutional right to raise the debt limit rest in the Congress, but for the good of the country, to protect social security benefits and to pay our soldiers among other debts of the country he was force to act because of the inability of the Congress to act.

I know that some in Congress will be outraged and I understand and appreciate their outrage, but perhaps my action will unify the Congress to come up with a fair and balanced approach to the deficit problem and get me a bill I can sign.

As outrageous as this seems in my mind it could happen.

Dan Perkins

Monday, July 25, 2011

Will the Outcome of the Budget Battle Signal the Demise of the Democratic Party?

I warned you to watch the bond market and the direction of interest rates for an indication of the possible outcome of the deficit deal. Up until the middle of last week the bond market was suggesting, based on the level of interest rates, that there would be a budget deal. As of the close on Friday I’m no longer sure there will be a deal by August 2nd.
During the American Civil War there was a “high water mark” which the Confederacy reached and then started it’s long decline to surrender. At the time the high water mark happened nobody knew that it had been reached. The Civil War “high water mark” was the bloody angle in the third day of battle at Gettysburg,
Perhaps the Democratic Party reached its high water mark with the passage of the universal health care legislation. We are at a stale mate in direction as to how to solve the debt and deficit problems in the United State. The Democratic Party says they are willing to make budget cuts but the “rich” have to pay more. They say they want the tax increases now and will make the budget cuts over the next 10 years. This idea is like the Ole Miss direction play in football. Try and convince your opponent that you are going one direction and then go in the opposite direction.
In the past when we have had one of these confrontations the Republicans have been the party to cave and they may well cave again this time. They seemed to have staked out the ground that insists on cutting expenses and not raising any new taxes.
If the Republicans hold their ground and the Democrats agree to entitlement cuts the President will lose his base and the Democratic Party will start to decline from the “high water mark.” If the Democrats lose the Senate and the White House in the next election it will be based on the Democratic failure to respond to the public need to restrain the budget. How can we tell Greece, Spain, Portugal, Ireland and Italy that they must adopt austerity programs while we continue to spend and spend and get deeper and deeper in debt ourselves? Is that a misdirection play on the part of the United States?
As much as I hate to say it, I do not think we will find a solution by August 2. I know that everybody knows the outcome, or they think they know the outcome if we fail to act. The ground that has been staked out by both parties will not allow them to give in and find a solution. The one question that lingers in my mind is do they care if we default? Would Democrats rather see the country go in default rather than give up their entitlement programs? I think so. Would Republicans rather hold the line on tax increases at the expense of the country going into default? I think so.
I think, in either case, the great social programs that started with FDR are history and it is only a short amount of time before it all unfolds right in front of us. As I said before, watch the yield on the 10-year T-Bond as we get closer to the deadline.
Dan Perkins

Sunday, July 10, 2011

Does the Glitter have a little Tarnish?

I can take no credit for this blog idea. It came as a result of a discussion with a client. That client sent me an e-mail saying he was thinking about selling out his equity funds in a brokerage account and using the proceeds to purchase gold. He was very concerned about what might happen with the debt ceiling if congress and the president can’t agree and we go past August 2nd with no settlement.

I want to interrupt this story for just a moment. I have grave concerns that while the leadership may come up with a deal it is no guarantee that the full house and Senate will vote to agree with the leadership. No one is talking about the possibility that the plan might not be confirmed. The president and both parties leadership agreed on a plan to deal with the financial crisis three years ago but do you remember the House didn’t carry the motion. We have a Republican controlled house with a lot of Tea Party congressmen who may vote the bill down.

Meanwhile back to our story. My client is concerned about inflation, the falling value of the dollar and the possibility of default on government paper. He feels like he needs some protection and buying gold will give him the ability to pay for food and other necessities. So he ended his note to me asking me what I thought about his idea, I did a great deal of thinking and decided that all of you could perhaps benefit from my thoughts.

My most immediate idea was to suggest the GOLD Exchange Traded Fund (ETF) IAU. The price was just over $15 on this past Friday. The ETF is a way to own physical gold on a shared basis. I sent my client this first idea and he came back to me that he wanted to own the bullion not share in a fund. So, I went to work to see what I could do for him. My research showed that bullion was the lowest cost to own. I found the non- numismatic coins have the least costs and the highest liquidity. So, I concluded that the non-numismatic American Eagle coin has the most liquidity and it is legal tender,  sort of. At the time of this posting the spot price for gold was $1,541.60 and the best price I could find on the web for a one ounce American Eagle coin was $1,895. So the coin has a 20% premium to the spot price of gold. Seems a little rich.

Next I went to Goldline.com to see what they had to say about the cost to buy and sell gold. I did a little deep diving on the site on the risk and disclosure section http://www.goldline.com/buygold-investmentriskdisclosure#A there is a subhead called Our prices and it says the following: “There is a price differential or "spread" between our selling price (the "ask" price) and our buy-back price (the "bid" price). This is often referred to as a "transaction cost." A typical spread on our most common bullion coins (e.g. Canadian Maple Leaf or South African Krugerrand gold coins) may range from approximately 5% to 20% depending on the coin though spreads may increase based upon market conditions, availability and demand. Our spread on semi-numismatic coins, rare or numismatic coins and rare currency currently ranges from 30% to 35%. To illustrate how this spread works, consider the following example. If the spread on a coin is 35% and Goldline's ask/sell price is $500 for the coin, then Goldline's bid/buy price is $325. Your coin must appreciate more than $175 to earn a profit. If you choose to sell your coin back to Goldline, you must also pay a 1% liquidation fee. Purchases of less than $1,500 are subject to a small lot fee of $15.”

If you buy gold for $1,545 and the American Eagle is selling for $1,895,  gold  must rise to almost $1,900 for you to break-even. All the time it takes for your investment to break even you will be making nothing, no dividends. Now let’s go back to the question of paying for things and I’m going to be a little absurd. You walk into the quickie mart to buy gas and coffee. Are you going to give the guy behind the counter an American Eagle? I don’t think they have a slot in the cash register for American Eagles. Is he going to give you gold in change or American dollars? My guess is American Dollars which just what you are trying to avoid. Most likely you will have to go to a coin store and sell your coin for dollars if they are open when you need to exchange and they are buying the day you need to sell.

Now the next issue is what do you do with these American Eagles once you own them? Do you have a safe installed in the house to keep them secure? In the case of this client I know they have two homes. Will they get a safe in each house?  Will they carry the coins in the car as they travel and take it into the hotel room or put it in the hotel safe? My guess is that they would want to substantially increase their homeowner’s policy for the amount of gold they own. I don’t know how much it costs to insure say $150,000 in gold coin or if the insurance company will even insure that amount of gold.  Perhaps you take them to the bank and put them is a safe deposit box. That would work as long as the bank is open when you need to get your coins.

I’m not trying to discourage you from buying gold. In almost 40 years in this business I have seen many gold waves come and go and many people get burned. In our example you need gold to move $300 just to break even not counting insurance, taxes, or transaction fees. Buying gold should not be viewed as an investment but as a hedge or insurance. You buy insurance on your house and even if you never have a significant claim, was it worth the insurance? Yes.

If you are looking at gold as an investment then I believe there are far better ways to invest than in gold.

Dan Perkins 

Sunday, July 3, 2011

You do the math and see how close we are to a deal on the debt limit.

This past week we found out 2 numbers from the President on he wants to settle the budget deficit and to raise the debt ceiling. The first is he wants $400 billion in new taxes and the second he is willing to cut $1 trillion from the budget over the next 10 years. Now look below at the spread sheet from the CBO which shows the projected deficit for 2011 is $1.4 trillion.

So here is the math $400 billion over 10 years is $40 billion per year of new taxes if it happens. A $1 trillion reduction in the budget over 10 years is $100 billion per year. If we get $40 billion in new tax revenue we will reduce the $1.4 trillion annual deficit by $60 billion or $5 billion per month. If we are running a $120 billion a month deficit then $5 billion a month doesn't even begin to solve the problem that my children and my expected grandson will have to pay if they have any money left.

You have better math send me a comment.

Watch the bond market over the next few weeks and it will tell you the likelihood of meaningful reform.

Dan Perkins

Thursday, June 30, 2011

Interest rates skyrocketing


I suggested in a recent blog that the bond market didn't believe that the government would default on Aug 2. I also suggested that the stock market would possibly return close to its recent high.

The S&P 500 is up from 1261 on June 15 to 1320 as of the time this blog was written. I still think that the S&P 500 will get somewhere between 1360 and 1370 before the end of August. Of greater importance is the fact that in the same period of time the stock market was advancing the yield on the 10-year T-Bond has moved from 2.86% to 3.17%. 

As you can see the yield on the 30-year has moved to 4.42%. If bond investors are beginning to focus on the deficit debate in DC I can see why they might be worried. Clearly the President rhetoric last night doesn't seem to offer any cooperation from the White House. The White House seems to think we need $400 billion in new taxes over the next 10 years to solve the problem. If the yield on the 30-year T-Bond gets past 4.75% the equity market could be in trouble perhaps sooner than I thought.

Below is the chart on the hedge we have been using the TBT which is a short of the long-term bond market. The TBT price action is the exact opposite of the bond market. When bond prices rise the value of TBT falls as interest rate rise and bond prices fall the value of TBT increases. The chart shows the dramatic rise in interest rates in the last 2 weeks affect on the price of the TBT. Watch the debate on the debt ceiling that will give you the direction on interest rates and the market. 


Dan Perkins

Tuesday, June 28, 2011

If Greece Defaults Could it Bust the Buck in Your American Money Market Mutual Fund?

Most Americans don’t know that 55% of all the assets in American general money market mutual funds are invested in European bank CD’s and commercial paper. Moody’s and S&P have warned that if Greece defaults many European banks who are massive holders of Greek bonds would find significant declines in the value of commercial paper and other cash investments.
I think that if the markets re-price the money market investments from these banks the American money funds will be forced to break the $1.00 net asset value. This "breaking the buck" on a wide spread basis will cause a major run on the money funds. The last time there was a run on money funds was in 2008 and 2009 and then the Fed put up $180 billion to save the industry, but I don’t think they will do it again, because we don’t have the money. 
Changes ordered by the SEC last year in money market mutual funds didn’t, in my opinion, go far enough. The two problems that led the Fed to bail out the industry in 2008 and 09 were extended duration and lower credit quality. Both of these issues were designed to get higher yields and both backfired. With 55% of money funds assets in European banks these funds have too much exposure to these banks. 
I said in an earlier blog that I felt we could see as much as a 10% correction from the top of the market for the year. If we are going to get that 10% we need the S&P 500 to hit 1225. The current 200-day moving average is around 1250. We hit close to that 1250 level on June 15, 2011 when the S&P 500 had an inter-day low of 1258.

My best guess, as of right now, subject to adjustment that I will talk about in a moment, is that we will not hit the 1225 level this time around. It looks to me like we could have a nice rally from this level back to the 1360 to 1370 level on the S&P 500 by the end of August, but no new high.
I think the Fall of the year could see a significant decline in the S&P 500, perhaps as much as 20%. If that 20% were to be reached then it signals a new recession. What could make my target come sooner rather than later? As I have indicated in several past blogs the debt ceiling is critical.  If Congress does not extend the debt limit with spending cuts then I believe that interest rates will rise, stocks will fall and the dollar could go into free fall. We will feel like we are back in September 2008 all over again. The other factor could be a default by Greece or other countries on their debt. Watch for the votes on Wednesday and Thursday this week in the Greek Parliament for the austerity measures, also the budget and debt ceiling story for the direction of the markets and interest rates.

Dan Perkins

Thursday, June 23, 2011

The Tale of One City. This is no Dickenson Tale

The Harrisburg, state capital of Pennsylvania, is  a town  that I have driven  through many times on my trek back to Columbus over the last 33 years. According to a recent analysis from the PA state Department of Community and Economic Development, DCED, Harrisburg is likely to end the year with a nearly $3.5 million deficit in its $58 million budget, and things are only expected to get worse. By 2015, the deficit is likely to be $10.4 million, which will eat up about 16 percent of the city’s general fund budget. It can’t be much surprise that the city finds itself essentially  a ward of the state under the auspices of Act 47, a receivership program that is basically the final firewall between the capital city in the nation’s sixth-largest state and bankruptcy court.
“The City of Harrisburg is facing a direct, immediate and grave financial crisis,” the DCED wrote in a massive 422-page analysis of the government’s perilous condition. “The financial crisis is so severe that the City teeters uncomfortably on the verge of bankruptcy that could be triggered at any moment by parties outside its control.” The study further warns of possible “catastrophic results” in which bankruptcy might come from “the stroke of a judge’s pen.”
How did this happen?
Harrisburg, a city of 49,000 people, finds that its financial problems are multi-pronged, but started with what, at the time, seemed like a good idea; build an incinerator plant to deal with the solid waste not only for Harrisburg but perhaps other cities that were closing landfills and needed alternatives for waste disposal. This disastrous 2003 incinerator project that was supposed to be a revenue driver has ended up costing the people of Harrisburg millions of dollars in cost overruns and malfunctions.  The city still owes $220 million on the bond issue to build the plant. The debt service on that project alone is $18 million per year, which amounts to nearly one-third of the entire 2011 city budget. How is it possible that a city that has a budget of $54 million per year can afford $18 million in interest payments and on top of that they still have to pay back the $220 million they borrowed to build the plant, They can't.
In short, irresponsible public spending combined with crippling fixed costs and an inability to grow have probably sent the City of Harrisburg into bankruptcy. My guess is that the state does not have the funds to bail out the city and take over not only the $220 million for the plant, plus the other debt of the city. Meredith Whitney has publicly stated that she feels we will see many municipal defaults at the city and local government level before things turn around. Harrisburg is one example of why I continue to shy away from municipal bonds and will do so no matter how compelling the value seems to be in the municipal bond market.
We are facing problems across the country where local and state government do not have the income to cover the liabilities already on the books. Some investors will lose some of their money. Keep in mind that even if you own insured muni bonds the insurance is only as good as the financial resources of the bonds insurers. If losses exceed assets the municipal bonds insurers will not be able to pay all the claims you will lose money even if you bought insurance protection.
Dan Perkins

Monday, June 13, 2011

Trust Preferred's over common

This is why I buy preferred. The chart below shows a price change of Bank of America common vs, the preferred H which we own. The common came off its bottom but paid no dividend and has been falling back from its peak. The preferred came back and paid 24.4% in dividends in addition to the price recovery.  This is a perfect example how being paid works.

Dan Perkins