Thursday, August 31, 2006

Economic Stats for the Day

Several economic statistics were released today. Most continue to point toward an economic slowdown and moderating inflation.

Personal income increased $60.2 billion, or 0.5 percent, and disposable personal income (DPI)
increased $63.9 billion, or 0.7 percent, in July, according to the Bureau of Economic Analysis.
Personal consumption expenditures (PCE) increased $78.7 billion, or 0.8 percent. In June, personal
income increased $60.0 billion, or 0.6 percent, DPI increased $47.8 billion, or 0.5 percent, and PCE
increased $36.6 billion, or 0.4 percent, based on revised estimates.

Personal Income and Expenditures were in line with market expectations. The inflation numbers in the report were also in line with expectations.

U.S. factory orders fall 0.6% in July
WASHINGTON (MarketWatch) - Demand for U.S.-made factory goods fell 0.6% in July on a large drop in orders for transportation goods, the Commerce Department said Thursday. Excluding the 10.1% decline in transportation orders, factory orders rose 1.1% in July, the government said. The 0.6% decline was slightly stronger than the 0.9% drop expected by economists surveyed by MarketWatch. Shipments of factory goods were unchanged in July. Factory inventories increased 0.6%, the ninth increase in the past 10 months. The inventory-to-shipments ratio rose to 1.17 from 1.16.

The ex-transportation number +1.1% was pretty good. Transportation orders (aircraft mainly) are very volatile so excluding that portion gives a better idea of activity.

U.S. Aug. Chicago PMI 57.1, close to expectations
WASHINGTON (MarketWatch) - Business activity in the Chicago region decelerated slightly, but continued to expand at a moderate pace, according to NAPM-Chicago. The Chicago purchasing managers index fell to 57.1% in August from 57.9% in July, the private group said Thursday. The decline was in line with economists' expectations, according to a survey conducted by MarketWatch. Readings over 50 indicate growth in the region. Economists use the Chicago index to gauge the August national business index to be released on Friday by the Institute for Supply Management. Economists expect the Aug. ISM factory index to hold steady at 54.7%.

The Chicago PMI was about as expected and indicates further expansion. The national ISM survey will be out tomorrow.

Overall the reports out this week have all been Fed friendly. Tomorrow we get the employment report but unless it's way out of line, don't expect much market movement in this pre-holiday week.

More Mutual Fund Scandal

NASD Charges American Funds Distributors, Inc. with Arranging $100 Million in Directed Brokerage Commissions for Top Sellers of American Funds

Washington, D.C. -- NASD has charged American Funds Distributors, Inc. (AFD) with violating NASD's Anti-Reciprocal Rule by directing approximately $100 million in brokerage commissions over a three-year period to about 50 brokerage firms that were the top sellers of American Funds. The payments were made to reward the firms for past sales and to encourage future sales of American Funds' 29 mutual funds.

AFD is the principal underwriter and distributor of American Funds, the third largest mutual fund family in the U.S. with more than $450 billion in assets and approximately 25 million shareholder accounts. The commissions were payments for executing trades for the American Funds' portfolio that were directed to the brokerage firms as additional compensation for past sales of American Funds, and to ensure that American Funds would continue to receive preferential treatment at those firms.

I wonder if the commissions charged by these brokers was competitive. We know that fund companies routinely pay higher commissions to brokers in exchange for research; it seems likely that they would be willing to pay higher commissions for sales of the funds too.

Our sole source of revenue is the fee paid by our clients. We don't have any conflicts of interest. If we buy a fund, it's because it's the best fund available.

Wednesday, August 30, 2006

Option Expensing - I told you so.....

In the previous post, I talked about the possibility that the new rules about options expensing would result in more opportunities for clever CFOs to manipulate earnings. It seems I was wrong; companies actually manipulated earnings in anticipation of option expensing:

In preparing for adopting the new rule and to lower future stock-option expense amounts reported in the income statement, some companies accelerated the vesting of employee stock options, typically those that were out of the money or "underwater." We identify 900 companies with a median market capitalization of $251 million employing this strategy. This is an increase of 151 companies with a median market capitalization of $276 million over those identified in our January 2006 report. We estimate over $8 billion of future stock-option expense has entirely vanished from future income-statement recognition as a consequence of stock-option-vesting acceleration.

In our view, for companies granting a similar dollar value of options and/or restricted stock in 2006 compared to historical amounts, there is a greater likelihood that option-vesting acceleration was used as a means to temporarily benefit reported earnings.

That's from a Bear Stearns study as reported in Barron's. Click on the title to read the entire article.

Does anyone really believe that companies won't find a way to manipulate option grants and expenses to benefit future earnings?

Option Expensing

Incentive stock options have been in the news again with the "backdating" scandal. The issue is whether various companies' executives manipulated option grants by backdating them to a time when their stock price was near a low and therefore guaranteeing themselves a profit. I haven't followed this scandal that closely because frankly, I don't see that it's a big deal. Shareholders were told the quantity and price of the option grants and if they had a problem with it, they could sell the stock. Furthermore, if the executive had something to do with the subsequent rise in the stock price, maybe he/she should be compensated through a bonus scheme. Giving the bonus in the form of a backdated option merely makes the bonus taxable as a capital gain rather than regular income. And I never have a problem with anyone paying less in taxes.

My greatest concern about options has been the accounting treatment that now requires all options to be expensed through the income statement. This change was supposed to make more obvious the true cost of the options that were being granted to top executives and was pushed by the class warriors who are concerned about CEO pay. It all smacks of envy to me, but nevertheless, the FASB (Financial Accounting Standards Board) caved in to the political pressure and decreed that all options must be expensed. Here's my problem with it; there is no way to accurately value the option at the time it is granted and forcing expensing just provides unethical executives another way to manipulate reported earnings. Furthermore, the "cost" of the options are already reflected in the balance sheet. If the options are exercised, existing shareholders will be diluted. The real problem was that investors were just too lazy to actually look at the balance sheet and all the footnotes.

Now, because of expensing, several questions arise:

1. What if the value placed on the option at the time of grant is wrong (as it is likely to be)? Will companies be forced to restate earnings from previous quarters or will there be adjustments in future quarters? Doesn't that make evaluating the company even harder than it was before expensing?
2. If the "cost" of the option is reflected in the income statement and through changes in the number shares outstanding, aren't the costs overstated?
3. What if the options are never exercised because the stock price declines? Will the companies add back the "expense" in a later quarter?
4. Since the "cost" of incentive options involves no outlay of cash, why should current earnings be penalized? Isn't it more like a future liability and therefore more properly reflected on the balance sheet?

The Wall Street Journal has an OpEd today about a group of economists and others who are pressing to end the expensing of options. The group includes Nobel Prize winners Milton Friedman and Harry Markowitz. Click on the title to read the entire story. Here's an LA Times article about the group. And here's a press release from UC Berkeley, where the position paper was published.

2Q GDP Revised Higher

WASHINGTON (AP) -- The economy grew at a 2.9 percent annual rate in the spring -- better than first estimated but nowhere near the brisk pace logged in the winter, another sign of slowing business growth. Inflation marched higher.

There's no surprise in this report. Inflation numbers were revised very slightly lower, exports revised up, inventories revised higher. Corporate profits were up 3.2% quarter to quarter but up 20.5% over the last year. This supports the Fed's view that the economy is slowing but not falling into recession. 3% growth, if inflation moderates, is exactly what the Fed wants. We'll have to wait for more data before we can determine if this continues or growth slows even more. Click on the title to read the whole story.

Tuesday, August 29, 2006

Bill Gross Likes Bonds!

Bill Gross, who manages the biggest bond portfolio on the planet, has a new commentary at PIMCO's website. Amazingly, Mr. Gross likes bonds and doesn't like stocks. Wow, a bond manager that likes bonds. Um, call me underwhelmed by Mr. Gross' pessimistic view of our economy and society.

Well, as I acknowledged at the start of this Outlook, some of us never have had it so good, but the demographic season is changing and a rebalancing, more equitable distribution of our rather meager stockpile of nuts lies ahead.

Gosh Bill, should I put some money in your fund to protect myself????? Geez, talk about self serving. Click on the title to read the rest of this depressing rant.

Fed Funds Folly

The Federal Reserve targets the Federal Funds rate in its efforts to control growth and inflation in the US economy. I have no idea why they think this will be successful as every effort at central economic planning in the history of the world has failed. How can a group of bankers and economists possibly expect to devine the demand for and proper supply of money in an economy as diverse as the US? I guess when your only tool is a hammer......Anyway, economist Paul Hoffmeister has an article in National Review Online about the futility of Fed Funds Targeting.

The evidence suggests that the recent fed funds targeting experiment has wholly failed in effectively restraining money-supply growth in relation to money demand. Attention should instead be focused on calling for the Fed to directly intervene in the open market by selling bonds to drain enough liquidity so as to cause gold to fall back to a non-inflationary level of $400 an ounce.

Click on the title to read the entire article.

Prudential to Settle on Market Timing

Prudential Financial may be close to settling charges concerning market timing of mutual funds.

NEW YORK (Reuters) - Prudential Financial Inc. (NYSE:PRU - news) may be close to a settlement with authorities that would resolve market timing investigations as early as Monday, Bloomberg News reported on Friday.

As part of the settlement expected to be announced on Monday, Prudential will pay about $600 million, according to a report on the Wall Street Journal Web site citing unnamed sources.

Under the agreement, Prudential, the second-largest life insurer in the United States, will avoid criminal prosecution the Bloomberg story said, sourcing it to people familiar with the probes.

Just another example of brokers looking out for their own interests. Click on the title to read the entire article.

Ameriprise Again

A subsidiary of Ameriprise Financial, Securities America, was hit with a $22 million arbitration award yesterday.

A securities-industry arbitration panel has awarded $22 million to a group of Exxon Mobil Corp. retirees who accused brokerage firm Securities America Inc. of improperly steering them into high-risk investments between 1996 and mid-2003.

The three-member panel of the National Association of Securities Dealers, the brokerage industry's self-policing organization, made the award Monday against Securities America, a subsidiary of Ameriprise Financial Inc.

The $22 million award includes some $11.6 million in compensatory damages, $3.5 million in punitive damages and $4.7 million in attorneys' fees, and is said by experts to be one of the largest of its kind ever levied against a brokerage firm.

Ameriprise markets itself as the broker to the boomer generation. Apparently, boomer refers to what happens to your portfolio if you decide to trust them with your retirement. Click on the title to read the entire article.

Monday, August 28, 2006

Pump and Dump

The internet has made communication simple and cheap. Unfortunately, that applies to the scammers too. This story from the Economist is about a new way to pull off an old scam - the pump and dump. The scammer buys stock in a thinly traded small company and then sends out mass emails encouraging others to buy the stock (the pump). When it rises, the scammer dumps his shares. I get these emails all the time and delete them without reading them. I suggest you do the same. Click on the title to read the whole story.

Barron's on Housing

Barron's cover article (click on the title to read the whole story) this weekend was about the homebuilders. They make the case that while housing is pretty bad right now, the stocks are very cheap and may present an opportunity. We don't have an opinion about the group as a whole, although we are investigating a few individual names that are trading at steep discounts to book value. For those who want to play the whole sector, Barclay's now has an IShare for the group. The symbol is ITB and the top ten holdings are:

Pulte Home (PHM)
Centex (CTX)
Lennar (LEN)
DR Horton (DHI)
Toll Brothers (TOL)
KB Home (KBH)
Ryland Group (RYL)
Mertiage (MTH)
Standard Pacific (SPF)

Full disclosure: AIM does not own any of these stocks, but we have one client who owns ITB.

Weekly Economic Calendar

It's another jobs week with non farm payrolls released on Friday. Here's the rest of the calendar:


Consumer Confidence for August (Last Reading)106.5 (Consensus)102.0

GDP Revision for 2Q (Initial Reading)2.5% (Consensus)3.1%
Chain Weighted Price Index for 2Q (Initial Reading)3.3% (Consensus)3.3%

Initial Jobless Claims for week of Aug 26 (Last Week)313000 (Consensus)315000
Personal Income for Jul (June)0.6% (Consensus)0.5%
Consumer Spending for Jul (June)0.4% (Consensus)0.8%
Factory Orders for Jul (June)1.2% (Consensus)-1.0%
Chicago PMI for Aug (July)57.9 (Consensus)57.0

Non Farm Payrolls for Aug (July)+113000 (Consensus)+140000
Unemployment Rate for Aug (July)4.8% (Consensus)4.7%
Michigan Sentiment for Aug (July)84.7 (Consensus)79.1
Construction Spending for Jul (June)+0.3% (Consensus)-0.1%

The releases that have the potential to move the market are probably Consumer spending and non farm payrolls. The GDP revision could have an impact if it is way out of line with expectations, but usually the consensus is pretty close on revisions.

Monday, August 21, 2006

Sarbanes Oxley

Hank Greenberg has an op-ed in the Wall Street Journal today that should be required reading for every politician in Washington.

"Three words describe the prevailing sentiment in today's business environment -- private is beautiful. Increasingly, major U.S. corporations are removing themselves from the public equities markets and going private.

Why? To a large degree, because the cost of government regulations has become unbearable. HCA, the largest hospital operator, recently announced a record $21 billion deal to take itself private. Among reasons cited by the company's founder, Thomas Frist, for departing the NYSE: the untenable cost of complying with Sarbanes-Oxley. The recent trend of major companies going (or planning to go) private -- Hertz, Toys "R" Us, Kinder Morgan, Albertson's, Univision -- is not coincidental. And that's only half the tale. While corporations are retreating from our public capital marketplace, exchanges in the rest of the world are thriving at our expense. Of the 25 largest IPOs worldwide in 2005, only one took place in the U.S. Most went to London or Hong Kong. Even Australia weighed in with three."

The costs of compliance with the various and sundry regulations, such as Sarbanes Oxley, enacted after Enron/Worldcom, etc. is so great that companies are increasingly choosing to abandon the public market. While this may be good for shareholders in the short term (reduce the supply of stock and theoretically the price should rise), it is not good for the economy in the long term. The current regulatory environment discourages risk taking and limits the availability of capital to enterpeneurs. These entrepeneurs are increasingly going abroad, where the regulatory environment is more forgiving, to raise capital. With our economy increasingly focused on services, we cannot afford to discourage companies from partaking of those services.

Read the rest....

Friday, August 18, 2006

Time for Insurance Stocks?

Living in South Florida this time of year means thinking about hurricanes; so far this year I haven't had to think about much. We've had a couple of tropical storms come near us, but nothing even close to last year. Of course, I knew we wouldn't have any storms this year; my wife spent a small fortune on hurricane supplies at the beginning of the summer and that usually ensures a quiet season.

Last year was a terrible year for storms and naturally the public expected this year to be similar. Al Gore and the global warming crowd cite last year as evidence that climate change is causing more severe weather. I don't have any expertise in climate research, but I do watch the local weather every day. I can't figure out how people can believe that climatologists have figured out what the weather will be in 50 years when they can't tell me what it will be next week. I also happen to think humans are rather insignificant in the face of Mother Nature. I don't know if the hurricane season will produce a major storm this year; there's still a long way to go in the season and I'm furiously knocking on wood right now. But I do think the odds of a major storm are less this year because of the extreme activity last year. Here's some evidence that maybe Mother Nature is still on the ball:

"Hurricanes require warm sea surface temperatures (SSTs), and last year the tropical Atlantic sea surface temperatures were running well above normal. Global warming was the explanation given by most 'experts' the media interviewed. And since global warming will only get worse, those SSTs were expected to just keep on increasing.

But now those same regions that had anomalously warm SSTs last year are -- gasp! -- near normal.....

This is not the only surprisingly cool SST story. A new scientific article now accepted for publication in Geophysical Research Letters shows that the globally averaged upper ocean cooled dramatically between 2003 and 2005, effectively erasing 20% of the warming that occurred over the previous 48 years!

The rapidity of this observed temperature change is beyond what computerized climate models can explain. This is perplexing for modelers, who tend to believe that their models contain all of the important physics of the problem."

Read the rest via TCS

So why, you might ask, is this post on an investment advisor's blog? Well, maybe it's time to consider the insurance sector. Since I don't buy that many individual stocks, I looked for an ETF that invests in insurance stocks. Our friends at Barclay's have one:

Dow Jones U.S. Insurance Index Fund (IAK)

The iShares Dow Jones U.S. Insurance Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones U.S. Select Insurance Index.

This fund has 44% in property/casualty stocks, P/E of about 15, expense ratio of 0.48%. The only drawback is that 23% of the fund is in one stock, AIG.

Powershares has an insurance portfolio as well:

Symbol is PIC, P/E of about 12, expense ratio of 0.60%. It doesn't break down the portfolio into property/casualty insurers, but it is more diversified; the largest position is LNC (Lincoln National) at 5.43%. The Powershares portfolio is also one of the new fundamental indexes that is intended to outperform the more traditional capitalization weighted indexes.

Alhambra has not taken a position in either of these funds -- yet. We may or may not; it's just something we are considering at the moment. If we actually start buying, we'll let our blog readers know.

Friday, August 11, 2006

WSJ Economic Forecasting Survey

The Wall Street Journal conducts polls of economists on a monthly basis. These polls give us an idea what the consensus is about future economic data. Do they provide any useful information? If forecasting accuracy is the measuring stick, then I think they come up a little short.

The graphs above show the average GDP growth forecasts of the survey vs the actual GDP growth results and the average forecast for future GDP growth. As you can see, the forecasts and results appear to be almost random. Should we care what they are forecating in the future?

Here's another example from the CPI (inflation) forecasts:

Again, it doesn't appear that the average forecasts provide us with any useful information. The consensus on these things almost always turns out to be wrong and yet the market moves, sometimes violently, when these numbers are reported to be above or below consensus. Why?

The more interesting information in these surveys, in my opinion, is in the extremes. What is the highest and lowest forecasts for these various data points?

The highest estimate of Q3 GDP growth in the survey is 4.2%. The lowest estimate is 1.5%. The likelihood that the number falls somewhere between those two numbers is probably pretty high. Based on past results, it seems unlikely that the number will fall near the average. So, the trick it seems to me is to try and determine which extreme is more likely and which would be a greater surprise. Why? Because that's what would produce the greatest move in the market. So, what would be the greatest surprise right now?

The Fed is expecting, and I believe that market participants are expecting, the economy to slow. The Fed's hope is that slower growth will produce lower inflation and mitigate the need for further rate hikes. Based on recent market action, it appears that market participants are worried that the Fed has been too successful in their campaign to slow the economy. They are worried about recession. Since the market is already worried about that, it is being discounted. Therefore, the biggest market moving event would be if growth came in near the highest forecast rather than the lowest.

There is useful information in these surveys, it's just not what the WSJ is reporting. The averages are useless except to determine what is least likely. The extremes provide more useful, actionable information.

Thursday, August 10, 2006

Fed Policy and Commodity Prices

In an article for NRO, Thomas Nugent claims that the Federal Reserve uses a price rule to determine the course of the Federal Funds rate. This means that, as Nugent puts it "the Fed will supposedly track the price of a basket of commodities as a benchmark for inflation, and when the price of this benchmark moves above a certain level, the Fed will raise the fed funds rate (the price of money) until commodity prices move back within the target range."

He then goes on to claim that he did a study once upon a time that proved the Fed was indeed doing exactly this.

"In 1989, in an article for Laffer Associates (“The Price Rule Vindicated”), I tracked the implementation of the price rule relative to a proxy for the Fed’s benchmark, the Dow Jones Spot Commodity index, from 1982 through 1989. My conclusion was indeed that the Fed was conducting monetary policy using a price rule."

I think maybe Mr. Nugent needs to update his data because commodity prices have been anything but stable over the last several years. The Fed may have been using a price rule back in the 80s, but sometime over the last decade or so, it has been abandoned in favor of the Chairman Knows Best rule. Unfortunately, that rule seems a bit more flexible.

You can read the rest of Mr. Nugent's ode to central banks article here.

Abusive Mutual Fund Sales Practices

One of the reasons I decided to open Alhambra is that I was fed up with being associated with the brokerage industry. The brokerage industry has a long history of abusing their clients, usually in ways the average investor doesn't even understand. I know many fine individuals in the brokerage industry, but as a whole, it seems to be run by people that are ethically challenged to say the least. Here's another example:

"Regulators took a series of new steps in their efforts against abusive mutual-fund sales practices, as they wind down a crackdown on brokerage firms that allegedly collect special payments to promote favored funds.

Yesterday, the National Association of Securities Dealers said it fined four broker-dealers affiliated with ING America Insurance Holdings Inc., a unit of ING Groep NV, $7 million for taking brokerage commissions from mutual-fund complexes in return for preferential treatment of their funds."

To put this in terms everyone can understand, these firms demanded and received kickbacks, in addition to the regular commisssions they collected, to promote particular mutual funds. The kickbacks were either in the form of brokerage commissions paid by the mutual funds or direct cash payments. The effect was to raise the expense ratios of the funds to the detriment of fund shareholders. The brokerage firms had reason to push these funds on unsuspecting clients regardless of whether they were appropriate or the best funds available. These brokerage firms put their interests ahead of their clients.

Lest you think this is just one small brokerage firms doing this, consider this:

"The penalty was part of a series of actions NASD has taken in recent years to end directed brokerage. In April, it fined American General Securities Inc., a unit of American International Group Inc., $1.1 million, for allegedly engaging in the practice.

Other sanctioned firms include Ameriprise Financial Inc., then known as American Express Financial Advisors; Lord Abbett Distributor LLC; AllianceBernstein Investment Research & Management Inc.; Wells Fargo & Co. affiliate Wells Fargo Investments; and SunAmerica Securities Inc., another subsidiary of AIG that is now called AIG Financial Advisors.

A 2003 action against Morgan Stanley by the NASD and the Securities and Exchange Commission was one of the higher-profile cases in the broader campaign. The firm paid $50 million to resolve the actions by the two agencies."

"It was pretty widespread, in this particular area, but most of the firms, if not all, have gotten this message," said James Shorris, head of enforcement at the NASD. "We're not opening new investigations into directed brokerage, at least not at the rate that we were a few years ago."

Mr. Shorris added that directed brokerage and market-timing cases -- in which firms traded in and out of mutual funds rapidly, letting them benefit from market-moving news and arbitrage when most shareholders didn't -- "seem to be winding down." Still, he said, "the mutual-fund area is still giving rise to other kinds of cases."

Read the entire story...

Wednesday, August 09, 2006

The Fed Pauses and the Market Yawns

It's been a while since my last post and while much has changed, you can't count the market averages among the changes. On August 1st, the date of my last post, the Dow stood at 11,125.73. Today we closed at 11,076.18. Between those two dates we got an employment report that showed job growth still slowing, a report showing productivity falling and wage inflation rising, various reports confirming the slowdown in the housing market, a shutdown of the largest US oil field in Prudhoe Bay and a pause in the Fed's rate hiking campaign. That sure seems like a lot of info for such litte movement in the averages.

Only one of these things was unexpected -- the Prudhoe Bay shutdown -- and that didn't exactly start a trend. Oil prices have been rising for some time due to various factors, so adding another didn't seem to matter much. All the other items were well anticipated by the market and it's usually the unanticipated event that causes big changes in the market. Welcome to the summer doldrums.

The sentiment about stocks and the economy are quite negative right now, so any positive devlopment would certainly be unexpected. I don't know what the news will be, but experience tells me that when sentiment is this negative, something usually comes along that surprises the crowd.

It's interesting to observe the buyers and sellers in this market. On the buy side you have private equity funds and corporations, mostly buying back their own stock but with some merger activity thrown in. On the sell side is mostly the retail crowd. There were outflows from open end equity mutual funds in June and July, indicating that the average investor was getting out as the market fell. Interestingly, ETFs continue to attract new funds; including ETFs there were inflows to equity mutual funds during July. Since, the ETFs are being increasingly traded by hedge funds, one could argue that ETF inflows during July were a result of professional traders buying rather than retail investors.

So, the pros are buying and the average investor is selling. I suppose this could be the one time when the retail do it yourself investor is right, but I'm not betting on it. My guess is that by the end of this year, those June and July sellers will be regretting that decision. And preparing to pay a tax bill as well.

Tuesday, August 01, 2006

Political Markets

In a post the other day, I mentioned that the stock market has performed better under Democratic administrations than Republican ones. That elicited some dis-belief from several readers, so here are the numbers:

When the Republican Party controls the White House and both houses of Congress (three periods), the S&P 500, on average, has increased 3.3%.

When Republicans control the White House and Senate and the Democratic Party controls the House of Representative (three periods), the average return has been 22.4%.

When Republicans control the White House and the Democrats control both houses of Congress (seven periods) the average return has been 13.9%.

When Democrats control the White House and both houses of Congress (seven periods) the average return has been 14.7%.

When Democrats control the White House and Republicans control both houses of Congress (three periods, all during Bill Clinton's administration), the average return was 44.9%.

I don't think the important factor here is party, but rather policy. The best period was during the Clinton administration and certainly Clinton was not a typical Democrat. He was a centrist from the Democratic Leadership Conference, which has practically no influence on the current Democratic party. Likewise, the period of complete Republican control, which shows the worst performance, was from McKinley to Taft, Harding to Hoover, and for two years during the Eisenhower administration. Considering that the middle portion, Harding to Hoover, includes the beginning of the Great Depression, I'm amazed that the number is positive.

The point is that the important factor is not the party in power, but the policies being enacted. Herbert Hoover signed into law some awful policies --- Smoot and Hawley were both Republicans. Richard Nixon enacted price controls and abolished the last link of the dollar to gold. Kennedy cut taxes. Clinton signed welfare reform and cut capital gains taxes. Good policy is good policy and bad policy is bad policy.

The question is what will we get in the future and how will it affect our investments. Two prominent policies that may be affected soon are the minimum wage and estate taxes. In my opinion, minimum wages are bad policy no matter the level because they distort the labor market. Having said that, unless there is a very sharp downturn in the economy, I don't think the planned increases will have a dramatic impact. An increase will probably marginally increase teenage unemployment, and while that may be distressing to parents, it probably doesn't have a huge impact. Likewise, the estate tax. Philosophically, I am opposed to estate taxes. It seems pretty low for the government to appropriate property honestly earned just because the earner has the misfortune to die without the benefit of a good tax attorney, but the affect on the economy shouldn't be that great.

There may be some individual companies that are affected by these policies, but overall I don't think there is much threat to the overall economy. Of greater concern, is the expiration of the tax cuts and I'll cover that in a future post.