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 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