Archive for July, 2009

Bonds Funds Gain on Hedge Fund Pain

Kurt Brouwer July 31st, 2009

Deleveraging Boosts Bond Fund Managers (MarketWatch, July 29, 2020, Sam Mamudi)

…Bond-fund managers say the exodus of leveraged hedge funds from their market pushed out spreads on debt securities to historic levels — a dramatic change from the middle of the decade.

In recent years, hedge funds were buying the securities at narrow spreads and making money by leveraging the trades. The spread represents the additional yield above U.S. Treasurys.

But as the credit market froze and access to leverage dried up, many of those trades ceased. What’s more, as panicked investors pulled their money out late last year, many hedge funds were forced to unwind positions to raise cash.

The combination of the two factors pushed down bond prices and raised yield spreads. As a result, mutual-fund managers are jumping back into the market.

“My environment as a non-hedge fund, cash-only manager is so much better now,” said Dan Shackelford, manager of T. Rowe Price New Income Fund .

…Hedge funds were making trades on debt securities that had fallen in price by fractions. They would make money on the deals by using leverage to magnify returns. But for mutual-funds, which are not allowed to use leverage, the small drops in price didn’t justify a purchase.

…But as hedge funds stopped buying — and were even selling — debt securities, prices fell, raising yields and widening spreads. Late last year, spreads spiked to more than 6%…

Fixed income mutual fund managers had a hard time competing with their highly-leverage counterparts at hedge funds until all of that unwound.  So far this year, bond funds have done pretty well.

GDP Fell 1% in Second Quarter

Kurt Brouwer July 31st, 2009

The Commerce Department reported today that Gross Domestic Product declined in the second quarter at an annualized rate of 1%.  This is the fourth negative quarter in a row [emphasis added]:

Real GDP declined 1.0 percent at an annual rate in the second quarter, better than the private-sector expected drop of 1.5 percent. This decline is noticeably less than the larger decreases of 5.4 percent in the fourth quarter of 2008and 6.4 percent in the first quarter of 2009. The revisions to 2008 data suggest that the economic slowdown was greater in that year than previously measured, with real GDP falling 1.9 percent during the four quarters of 2008 rather than 0.8 percent as was previously reported.

This was the first time that we have seen four consecutive quarterly declines in economic activity in a long, long time.  Reuters reports:

…With the contraction in the second quarter, U.S. GDP has fallen for four straight quarters for the first time since government records started in 1947.

That’s quite an interesting statistic about GDP decline.  There was a very large decline in 1946, but the economy rebounded quickly.

Here is a chart from the Bureau of Economic Analysis that shows the last year’s quarter-by-quarter decline:

Source: Bureau of Economic Analysis

The contraction in economic activity is slowing and could well turn positive in the next quarter.  Unemployment is still very high and I don’t think that will turn around very much until next year.

Taxing the top 1%

Kurt Brouwer July 30th, 2009

I knew the percentage was high, but I didn’t realize that only 1.4 million taxpayers (the top 1% income earners) pay more income taxes than 134 million other Americans do.  That’s startling and it is not healthy in my opinion.  I understand the argument that the top 1% earn a lot of income and so on, but it cannot be healthy that so much of our government’s revenues are dependent on such a small group.

Source: Tax Foundation

As the chart shows, the top 1% are paying an increasing percentage of income taxes:

Tax Burden of Top 1% Now Exceeds That of Bottom 95% (Tax Foundation, July 28, 2020, Scott Hodge)

Newly released data from the IRS clearly debunks the conventional Beltway rhetoric that the “rich” are not paying their fair share of taxes and disproportionately benefited from the Bush tax cuts.

…Remarkably, the share of the tax burden borne by the top 1 percent now exceeds the share paid by the bottom 95 percent of taxpayers combined. In 2007, the bottom 95 percent paid 39.4 percent of the income tax burden. This is down from the 58 percent of the total income tax burden they paid twenty years ago.

…Some in Washington say the tax system is still not progressive enough. However, the recent IRS data bolsters the findings of an OECD study released last year showing that the U.S.—not France or Sweden—has the most progressive income tax system among OECD nations. We rely more heavily on the top 10 percent of taxpayers than does any nation and our poor people have the lowest tax burden of those in any nation…

Who would have thought that our tax structure would focus more heavily on top earners than France or Sweden?  The next time you hear a politician suggesting we increase taxes on the ‘rich’ so that they pay their ‘fair’ share, you may want to ask yourself, how high can that share go?  Should we just have the top 1% pay the freight for everyone?  If so, problems are likely to ensue.

As an example, of how this works in one local government, New York City gets a huge chunk of income tax revenues from only 40,000 taxpayers.  Mayor Bloomberg points out the issues with this situation:

…”One percent of the households that file in this city pay something like 50% of the taxes,” explained the Mayor. “In the city, that’s something like 40,000 people. If a handful left, any raise would make it revenue neutral. The question is what’s fair. If 1% are paying 50% of the taxes, you want to make it even more?”

That’s the problem.  If a major portion of the revenue for a city or a state or even the country as a whole is tied to a very small taxpayer base, then tax revenues will be more volatile because top earners typically have incomes that are more volatile than normal wage earners.  And, if they get tired of higher taxes, the rich can move more easily than most people.

Via: Carpe Diem

See also:

Taxes Are For the Little People

Is a tax revolt brewing in California?

Taxing Your Charity

New York Times: Growing Unease on Healthcare

Kurt Brouwer July 30th, 2009

New Poll Finds Growing Unease on Health Plan (New York Times, July 29, 2020, Adam Nagourney and Megan Thee-Brenan)

President Obama’s ability to shape the debate on health care appears to be eroding as opponents aggressively portray his overhaul plan as a government takeover that could limit Americans’ ability to choose their doctors and course of treatment, according to the latest New York Times/CBS News poll.

Americans are concerned that revamping the health care system would reduce the quality of their care, increase their out-of-pocket health costs and tax bills, and limit their options in choosing doctors, treatments and tests, the poll found. The percentage who describe health care costs as a serious threat to the American economy — a central argument made by Mr. Obama — has dropped over the past month.

Mr. Obama continues to benefit from strong support for the basic goal of revamping the health care system, and he is seen as far more likely than Congressional Republicans to have the best ideas to accomplish that. But reflecting a problem that has hindered efforts to bring major changes to health care for decades, Americans expressed considerable unease about what the end result would mean for them individually.

“We need to fix health care,” Mary Bevering, a Democrat from Fort Madison, Iowa, said in a follow-up interview, “but if the government creates the system, I’m afraid the quality of care will go down and costs will go up: We will pay more taxes.”…

This New York Times/CBS poll reflects many others as well, including Gallup and Rasmussen.  Though most Americans agree that some changes in our current health insurance system are needed, most are also quite happy with their personal healthcare and health insurance.

The problem of rising costs and uninsured Americans are important issues that we would like to address. However, the idea that we are going to get solid solutions for these problems from Congress is seen as unlikely.

We have a 1,000+ page bill before Congress and, by the reports I read, most representatives and senators have not even read it.  That’s just wrong.  If our leaders are voting on legislation, the least they can do is read it.  As the NYT and other pollsters have found, Americans are increasingly uneasy about this issue.

Via: Brothers Judd Blog

See also:

Why Not Fix Medicare First?

Reform Healthcare Culture and Politics First

Healthcare Satisfaction vs. Congress

Is the Dow Flashing a Buy Signal?

Kurt Brouwer July 29th, 2009

According to various market commentators and pundits, this rally is either a cyclical or secular bull market, a ‘dead cat’ bounce, a reaction rally or any one of a number of other descriptions.  If this article from Bloomberg [emphasis added] is correct, more gains are ahead:

Dow Sends Buy Signal That Has Worked Since 1921 (Bloomberg, July 29, 2020, Eric Martin and Michael Patterson)

The Dow Jones Industrial Average is sending a buy signal that has foreshadowed gains of 18 percent during the past nine decades.

The 30-stock gauge climbed to more than 10 percent above its mean level from the previous 200 days, rebounding from 34 percent below the so-called 200-day moving average in November, according to data compiled by Bloomberg. Eighteen of the last 21 times the Dow rallied from at least 10 percent below the 200-day level to 10 percent above, it posted gains during the next 12 months, Bloomberg data since 1921 show.

…The Dow posted an average advance of 18 percent during the 12-month period following buy signals since 1921, Bloomberg data show. In the six-month period, there were 17 advances for an average gain of 8.2 percent. In three months, it climbed 18 times, averaging an increase of 5.7 percent…

The statistics mentioned in the piece are below.  The font is rather small, but that’s the best I could do without messing up the columns.  If you want to increase the size, hit Ctrl+.

Returns by the Dow Jones Industrial Average 12, 6 and 3
months after the buy signal.
Buy Signal            12 Months         6 Months      3 Months
June 11, 2020          13.36%             8.98%         3.01%
Jan 8, 2020            19.49%            15.38%         5.75%
March 5, 2020           9.05%             1.21%         1.11%
Jan  27, 1989          10.18%            13.46%         4.14%
Sept. 3, 1982          31.38%            23.02%        11.67%
July 18, 2020           3.78%             5.34%         3.48%
Aug. 9, 1978           -3.74%            -7.76%        -9.83%
March 7, 2020          26.43%             8.63%         9.11%
Dec. 7, 1970            4.73%            12.75%         9.69%
May 8, 2020             1.02%            -6.60%         1.41%
Jan. 25, 1963          15.20%             1.18%         5.68%
July 24, 2020          33.51%            19.91%         8.53%
Dec. 13, 1949          16.26%            15.04%         3.15%
Nov. 6, 1942           16.66%            18.21%         8.29%
Sept. 11, 1939        -16.61%            -4.49%        -5.20%
July 6, 2020           -3.05%            10.95%         7.49%
Feb. 18, 1935          43.10%            19.09%         8.06%
Apr. 19, 1933          54.47%            23.53%        51.63%
Aug. 29, 1932          37.72%           -31.68%       -21.87%
Aug. 18, 1924          35.82%            14.36%         5.46%
Dec. 12, 1921          21.89%            12.53%         8.12%
Average                17.65%             8.24%         5.66%

Via: Jesse J. Segreto

Barron’s expresses skepticism on this signal here:

…I have my doubts that the signal is meaningful for investors. More likely, it seems to be just an academic exercise looking backward in time to tell investors what they should have done weeks ago.

In my February column, I questioned the overall validity of tracking these two indexes in the modern world. Neither index really represents the same sectors they did when Charles Dow formulated his famous averages more than a century ago (see Getting Technical, “Be Leery of Dow Theory,” Feb. 19, 2009)…

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