The REAL Dow

Few investors realize that stocks have been among the worst investments of the past decade. If they do, they probably do not realize quite how bad the decade was, because most people forget about the effects of inflation. This is especially likely as our Main Stream Media refuses to discuss the “I” word. To the media and their government handlers, inflation is a non topic. If mentioned at all, inflation is said to be minimal, a non factor or “under control”.

Despite the 2009 rebound, the Dow Jones Industrial Average today stands at just 10520.10, no higher than in 1999. And that is without counting consumer-price inflation. In 1999 dollars, the Dow is only at about 8200 and would have to rise another 28% or so to return to 1999 levels. Using today's dollars and starting at 10520.10, the Dow would have to surpass 13460 to get back to its 1999 level in real, inflation-adjusted terms.

Controlling for inflation takes extra work and makes stock gains look puny, so it is easy to see why stock analysts almost never do it. And as stated above the media almost never do it either. Remember that most of the “business news industry” is part and parcel an arm of the Wall Street equity touting machine.

But other things do get measured in real dollars. When economists report whether the economy is growing, they account for inflation. When analysts judge long-term gains in commodities such as gold or oil, they often adjust for inflation, noting that gold hit a record this month in nominal terms but remains far from its 1980 record in real terms. Because analysts almost never do the same with stocks, it leaves investors with an exaggerated view of their portfolios' performance over time.
Looking at returns on a nominal basis can be very misleading. One must check inflation-adjusted performance to monitor investments' real value.

A few analysts trying to get a better perspective on investments' performance have taken to measuring the Dow in a variety of unconventional ways. Gold bugs look at the Dow based on gold prices, which makes its performance look much worse over the past decade. Europeans and others with international investments sometimes measure the Dow's return in euros. That makes the Dow look worse since 2006, a time when the euro has been rising. The dollar's recent rebound has helped make the Dow look a little better against the euro and gold, however.

Mr. Bernstein says some investors saving for education expenses compare returns to tuition inflation. If the portfolio doesn't rise as fast as education expenses, these investors reason, they will need to boost contributions. The same is true for someone saving for retirement expenses or for future medical costs.
Garrett Thornburg, founder of Thornburg Investment Management in Santa Fe, N.M., calculates what he calls "real-real" returns, adjusting stock performance not only for inflation but also for real-world drags such as taxes and fees.

Example : Nominally, a dollar invested in the stocks of the Standard & Poor's 500-stock index at the end of 1978 had blossomed to $22.88 at the end of 2008, including dividends, a sweet gain even after the 2008 meltdown. But once estimates of inflation, taxes and costs are removed, he figures, the investment was worth only $3.76.

But don’t jump off the bridge yet. I am not trying to put you off stocks entirely, until you consider the long-term alternatives. Measured over the 1978-2008 period, rather than over just one decade, stock performance in real-real terms actually is better than that of just about any other major investment class, Mr. Thornburg found: 4.5% a year. Stocks' ability to keep up with inflation over the very long haul may be their best selling point.

In real-real terms, stocks did better over that period than municipal bonds (2.5% a year), long-term government bonds (2% a year) and corporate bonds (0.2% a year). Real-real home prices were unchanged over those 30 years. Both short-term government bonds and commodities suffered losses.

Figuring out how to adjust for inflation can mystify most investors, although the Internet now offers several Web sites that quickly adjust numbers for inflation and some mutual funds and independent mutual-fund analysis services calculate returns adjusted for fees and taxes.

Prof. William Hausman at the College of William & Mary long has urged the media to offer people inflation-adjusted stock charts. He says newspapers and analysts frequently point to the Dow's 2007 record of 14164.53 and talk about how far the Dow would need to climb to return to that level. In inflation-adjusted terms, however, the Dow in 2007 never quite surpassed its 2000 record, Prof. Hausman calculates. To return to an inflation-adjusted record now, he adds, the Dow would need to break 15000. "It really puts in perspective how stocks are doing," he says.

Stock analysts sometimes like to note that the Dow today is worth 27 times its value at its 1929 pre-crash peak, meaning that even if you bought at the worst moment, your stock still would be way up over time. In inflation-adjusted terms, however, the Dow today is only a little over twice its 1929 peak, according to Ned Davis Research.

Some analysts measure the Dow against the performance of gold, which further dents the record of the blue chips over the past decade. Peter Schiff of Euro-Pacific, has popularized interest in measuring the Dow in gold rather than dollars. Gold has rebounded since 1999, and the fascination with the yellow metal has made investors start thinking of it again as a currency.

Ned Davis, the founder of Ned Davis Research, referred to gold as "real money" in a recent report and published charts of bonds, home prices and stocks measured in gold rather than dollars. Even with gold's swoon in recent days, the Dow looks a lot weaker over the past decade measured in gold than in dollars.

Of course, it is possible to find a hot investment that dwarfs the Dow's gains over any period, which makes many analysts question the value of adjusting the Dow for gold's gains. Such skepticism doesn't stop gold's supporters from pointing out how much weaker the Dow looks when measured in "hard" money.

In 1997, the Dow looked strong at 40 times the dollar value of an ounce of gold. With gold's rebound since 1999, the Dow now is worth about nine times an ounce of gold, meaning simply that gold has performed a lot better than the Dow.

For those who like bandwagons, that suggests that it is time to buy gold. For those who like to buy things when they are cheap, it suggests that gold was cheap in 1997, and stocks have gotten cheaper since, at least when they are measured against gold.

Remember that there are always exceptions in the equity markets. Stocks, that due to either a technology, a high demand service or commodity that they represent, can and will soar far and away above the Dow, and its 30 stock index. That after all is the lure to equities.

Omar P Bounds III
AARE., GPPA, CES
The Bounds Auction Company

Chinese to limit Treasury purchases in 2010

Supporting the Beach Ball!

The Blogger & Peter Schiff

This could easily be the most important story in the end of year run up of political & economic Bombshells - and it is likely to be completely over looked। With all smoke being blown up everyone's butts by the shenanigans surrounding the Senate health care debacle and the Copenhagen farce, this little story copied below got buried।

As Dollar Busters go - this very well could stand as the " other shoe" that many Dollar watchers have been predicting.

In The Fall of 2009, I attended a talk by given by Euro Pacific's President and erstwhile US Senate Candidate for Conn., Peter Schiff , where he predicted exactly this scenario. Schiff, a long time dollar critic and gold tout asks the question that no one in the US Government wants to hear:

When will "they" ( foreign sovereignty funds & the Chinese in particular ) stop buying our debt?

"The situation is not unlike a beach ball being supported by the hand of an outstretched arm " Schiff remarked. "Our currency & economy are that beach ball and the Chinese purchases of our Treasury notes are the outstretched arm. What happens to the beach ball when that arm is withdrawn? "

As this dollar watcher see it, there are two scenarios for the beach ball in the near term, neither of which is appealing.

#1। The "arm" is suddenly withdrawn and the market for US debt goes into collapse।The "Ball" gets dropped!

Whether it bounces or hits like a ripe melon is academic?

#2 The "arm" still supports the ball, but as the US's "beach ball" get heavier, becoming more like a 16 lbs shot put, the effort, as in the cost required to support it will go up.

The cost of the US debt goes up substantially.

What is the interest only payment on 14 Trillion?

Currently, the greatest influence on the "arm" is that most of the other "balls" in the game are getting heavier as well।

Omar P। Bounds III

The Bounds Auction Company

Published on ShanghaiDaily.com (http://www.shanghaidaily.com/)

http://www.shanghaidaily.com/sp/article/2009/200912/20091218/article_423054.htm

Harder to buy US Treasuries

Created: 2009-12-18 0:13:35

Author:Zhou Xin and Jason Subler

IT is getting harder for governments to buy United States Treasuries because the US's shrinking current-account gap is reducing supply of dollars overseas, a Chinese central bank official said yesterday.

The comments by Zhu Min, deputy governor of the People's Bank of China, referred to the overall situation globally, not specifically to China, the biggest foreign holder of US government bonds.

Chinese officials generally are very careful about commenting on the dollar and Treasuries, given that so much of its US$2.3 trillion reserves are tied to their value, and markets always watch any such comments closely for signs of any shift in how it manages its assets.

China's State Administration of Foreign Exchange reaffirmed this month that the dollar stands secure as the anchor of the currency reserves it manages, even as the country seeks to diversify its investments.

In a discussion on the global role of the dollar, Zhu told an academic audience that it was inevitable that the dollar would continue to fall in value because Washington continued to issue more Treasuries to finance its deficit spending.

He then addressed where demand for that debt would come from.

"The United States cannot force foreign governments to increase their holdings of Treasuries," Zhu said, according to an audio recording of his remarks. "Double the holdings? It is definitely impossible."

"The US current account deficit is falling as residents' savings increase, so its trade turnover is falling, which means the US is supplying fewer dollars to the rest of the world," he added. "The world does not have so much money to buy more US Treasuries."

China continues to see its foreign exchange reserves grow, albeit at a slower pace than in past years, due to a large trade surplus and inflows of foreign investment. They stood at US$2.3 trillion at the end of September.

Issues that can lift the Dollar.

The most recent employment data in the U.S. came in significantly better than what was expected and the financial markets reacted in a different way this time. Interest rates went screaming higher, the stock market surged, gold fell and the dollar shot up.

In a normal environment a stronger dollar following better U.S. economic data sounds perfectly reasonable, but in the current "risk-centric" environment GOOD news has been BAD news for the dollar. That's because it has enhanced the appetite for risk, which has translated into investors selling dollars in exchange for higher yielding/higher risk currencies.

This time around, the slightly improving data gave these dollar traders the idea that the Fed could begin reversing its zero interest rate policy sooner than later. That got the dollar moving higher. And that got the wheels turning for a bounce in the weak dollar trend. But, the Fed isn’t likely to change course anytime soon.
The dollar has continued to show strength following that turn in sentiment, but the prospects of a sooner move on rates has now been dismissed. This was a knee-jerk reaction in the markets that could soon likely be fully reversed, except in consideration of these other, more global forces , countering the 0 rate Feb policy.

What is now underpinning dollar strength is a shift in market focus toward some of the trends facing the global economic environment. That's swinging the risk appetite pendulum back toward safety, which is traditionally positive for the dollar.
In others words, as bad as the long term weakness of the dollar appears, the short term circumstances for other currencies is much worse.

So what can keep this momentum going in the dollar?
Answer: Growing risks to the global economy.

I can imagine 4 specific examples that could fuel more demand for dollars.

A. Rising Prospects of a Sovereign Debt Crisis
First it was Dubai that stoked fear in the financial markets over the Thanksgiving Day holiday. Now, Greece appears that it will struggle to meet debt commitments. Fitch downgraded Greece to just three notches above the lowest investment grade status. Greece has been the weakest link in the Euro chain since its adoption ion 2002.
Debt problems appear to be more contagious than H1N1. Debt concerns can devastate investor confidence in the capital markets of such countries, and in the global economy. And when confidence wanes, capital flees. That's a recipe for falling dominoes.

B: General Problems for the Euro
The recent downgrade in Greece turns the market focus back to the problems that exist in across the Eurozone, and that's putting downward pressure on the euro which has usually meant upward pressure on the dollar.
The E U's growth and stability pact limits all member countries to a budget deficit of 3 percent of GDP. But Greece is running a budget deficit of 12.7 percent of GDP. More than four times the limit.
In fact, the 16 member states of the Euro exchange are running budget deficits more than twice the 3 percent limit! Not as bad as the US, but significant.
So the uneven performance in Europe will likely call into question the viability of the euro currency again. Any of speculation of a break-up of the Euro is hugely dollar positive. I do not believe that will be the case. The EU has made its bed and will have to lie in it for at least the foreseeable future. But, such speculation could still abound within the periphery of the Eurozone’s weakest and more conservative member states.

C: Uncertainty Over True Economic Recovery
Now that sovereign debt problems are surfacing from Dubai, Greece, Spain and others, investors & traders are getting concerned about the sustainability of this recovery. After all, the unprecedented monetary response to the global fiscal crisis was an experiment. The outcome is unknown. And the underlying problems related to the crisis still exist: Bad debt, reduced wealth and tight credit to name a few. I believe we are facing the shortest, most volatile recovery ~ correction cycle in memory.

Moreover, when you counter a liquidity crisis by pouring money on it, you're bound to create more bubbles. While ground zero for the credit crisis was the U.S. housing market, new bubbles in real estate are developing in the areas that were relative outperformers in the downturn (such as China, India and Canada).
In Shanghai, housing, while traditionally in short supply, is on fire. Skyrocketing near 40 percent in October from the same period a year earlier. And in a story about the Canadian housing market this week, Bloomberg quoted a real estate agent as saying, "Where else in the world do you have agents lining up overnight to buy a condominium?"
Sound familiar? It should.

D: Trade Protectionism
We've already seen evidence of restrictions on global trade and capital flows from this new regime in Washington. Considering protectionism was a key accomplice in fueling the Great Depression, this activity represents a major threat to global economic recovery. Especially in consideration that the US no longer possesses a manufacturing infrastructure to protect, restraint of trade at this point is tantamount to closing the barn door well after the horse as fled. Only the consumer can suffer through higher prices.

Clearly, the biggest factor in the protectionism threat is China's currency policy. Even after recent tour stops in China by U.S. Obama and the European Central Bank President to lobby for a stronger Yuan, the Chinese have remained steadfast on keeping their currency weak. As this issue with China's currency gains in intensity, expect protectionist acts to rise in retaliation. In turn, expect collateral economic and political damage.

In conclusion: If sovereign debt problems within the Eurozone and the Mid East along with the prospects of a “W” market trend, high volatility, one can take from that trend that there will be a retrenchment away from risk in the short term and one might not be as eager to turn the risk appetite switch back on soon. That could give the dollar a strong lift that might last longer and rise further than many expect. Even myself, who has been contra dollar for some time.

Holding Costs In The Current Commercial Market

Investors often under estimate the true cost of holding non productive real estate in their portfolio. This is especially true in a downward cycle when true value is quickly slipping away over time despite any effort the investor may be taking to preserve value. Like the other numbers we deal with everyday in our lives; our daily caloric intake, cholesterol level or the true gas mileage of our vehicles; we tend to discount negative indicators. Real Estate investors are often optimistic, independent thinkers who believe that they will overcome any loss of value with the next turn of the market. The truth is often just the opposite. The longer you hold a non or under performing property the more it will cost, therefore the more value one stands to lose over a short period of time.

Besides the usual debt service, taxes & insurance costs, the overhead of a building, general maintenance as well as the physical deterioration of systems, roofing etc., must be considered in any holding cost analysis. Those costs, while considered the cost of doing business prior to any decision to sell, can quickly become onerous and fiscally destructive once the property lingers on the market for any length of time.
This is especially true of properties that have been closely held over a significant period of time or may be in an estate or trust. Equity can quickly deteriorate under the pressure of holding costs over an extended marketing period and these costs are rarely recovered through sale, especially in a soft market.

Extended time on market and the resulting holding costs are especially destructive to investors with properties already in distress and lenders holding properties in REO portfolios that are often overvalued. These properties are likely hemorrhaging equity. In addition, it cannot be ignored that these holding costs are also a lost investment opportunity. The value of these lost opportunities if invested elsewhere far out weighs any recovery in value over the short term. They become the cost “to not sell.”

Aggressive, auction marketing over a time defined period will deliver true market value to a property within its market demand, while drastically reducing this ever accruing “cost to not sell”. Rather than paying the extended cost to hold, investing in a comprehensive marketing campaign to bring property to market in a firm and time defined manner offers the opportunity to put both equity and costs back on an earning status in the shortest period of time, when time is not on your side.

Omar P Bounds III A.A.R.E., C.E.S., G.P.P.A.
The Bounds Auction Company

Unemployment 12/08/09
Last Friday we got word that the employment picture in the U.S. improved substantially over the month of November. According to the Labor Department, the nation shed 11,000 jobs, a mere fraction of the 130,000 economists were expecting.
The news came as a shock to many. In fact, president Obama reportedly corrected his chief economic adviser when she first told him the news, saying "You mean a one hundred and eleven thousand job loss?" And make no mistake, despite my general contrarian viewpoint — I'm as happy to hear the better-than-expected news.
But in my mind, there are deeper issues at hand when it comes to the employment picture.

Let's Begin with the Way Washington Measures Employment in the First Place Along with the 11,000-new-jobs-lost number, we also learned that the nation's unemployment rate dipped to 10 percent from last month's result of 10.2 percent. That's another encouraging sign, though it still represents a situation as bad as we've seen in decades.

What's more disconcerting to me is the fact that this official measure of unemployment is dubious in the first place.

Consider some of the people that it does not include:
• Anyone who is "discouraged" — i.e. they have basically given up on looking for work
• Anyone who has taken a part-time job even if they were formerly a full-time employee (known as "the marginally attached")
• And the legions of folks who are now "underemployed," meaning they are working jobs that pay far less than before — engineers driving cabs, for example -
Thus, we should be asking two important questions:

First, what is the nation's real unemployment rate? Interestingly enough, the Bureau of Labor Statistics also keeps what it calls "alternative measures of labor underutilization."

No, you won't hear this touted in a government press release.

The U-6 number, which includes marginally attached workers, workers with part-time jobs because of economic reasons, and other categories, shows the current jobless rate is 17.2 percent. And realize that there's really no way to include people who have taken major pay-cuts or other under-the-radar losses.

Secondly, will those underemployed folks ever find jobs comparable to what they once had? Obviously the answer is "some will, but other broad categories will not."
Consider all the Johnny-come-lately realtors, mortgage brokers, and contractors who were riding the housing bubble for all its worth. And consider other workers — like factory hands who were benefiting from over-the-top overtime payouts and other unsustainable trends.

Take a look this excerpt from a recent Wall Street Journal story on the underemployed. It makes my point:

"Mr. Crane had been earning more than $100,000 a year operating heavy machinery at Delco, a former unit of General Motors ... but when he lost his job he was thrust into a netherworld of part-time gigs: working the registers at Taco Bell, organizing orders at McDonald's, whatever he could find."

Now, don't get me wrong. I feel bad for Mr. Crane. But am I the only one who finds six-figure salaries on factory floors a little shocking? I know many entrepreneurs and professionals who make the same amount – or LESS! Sure, when factories were running full-tilt, even folks at chicken processing plants were raking in $70,000 a year or more. But those days are long gone.

I'm just saying that facts are facts.

Yet plenty of people have now become so used to the really good times — or are so far in debt — that they aren't willing or able to accept even merely good times.
The fact that people like this continue to collect unemployment — and even have their benefits extended — while millions of others are genuinely struggling and going uncounted demonstrates just how unfathomable this country's jobs situation is right now.

More importantly, all of these issues raise serious questions about the sustainability and rate of the economic recovery, especially with so much of GDP tied to consumer spending and so many consumers still struggling with credit hangovers from the days of excess.

So I don't care what the latest job number says. The recession seems to be abating, but many structural problems remain. And some of them are in our collective psyche.We must remember that an official unemployment rate of 10 percent is hardly something to celebrate.

Even as the overall picture improves, our economy will continue to wrestle with a protracted decline in available jobs and salaries as well as a massive credit hangover.

Omar P. Bounds III A.A.R.E., C.E.S., G.P.P.A
The Bounds Auction Company

More free money?
Senate extends home-buyer tax credit and jobless aid. The existing tax credit for first-time buyers, set to expire at the end of the month, has helped boost home sales across the country. Under the Senate bill, both first-timers and existing homeowners would be able to take advantage of the expanded program through the end of April.

The measure would continue giving an $8,000 tax credit to first-time buyers and would provide a $6,500 tax break to qualified homeowners looking to move up to middle-market homes that cost no more than $800,000.

In addition, the legislation would raise the qualifying income levels to $125,000 for individual income tax filers and to $225,000 for joint filers.
Set up for the next bubble? Rather the set up the next collapse - I believe this is a case of fueling the current fire.
As for good intentions - whenever I see Chris Dodd & Co involved - good intentions are last thing that come to mind. What comes to mind is the Community Reinvestment Act. Déjà vu all over again. Cash for clunker real estate.
As usual, govt. intervention in markets results in either helping those who do not need the help or introducing an element who should not be participating in that market.
This action by Govt. further “distorts” an already woefully distorted market. If someone is giving me a $6,500 “grant– gift or write off “ to buy what I would otherwise not be able to buy or need to buy – that becomes a $6,500 “distortion” of market value. Sounds like a meaningless amount until one ads up all the other “incentives “that are already in place to buy real estate and multiplying it over time and market size.
The best analogy I can think of is holding a beach ball up with your extended arm. Everything is fine as long as one keeps his hand under the ball. What happens when the arm is taken away?
All they are doing is falsely supporting an unsupportable situation that will not correct until they cease supporting it. This, as with most of what escapes the confines of the beltway, is about control, votes and lobbyists money.
Especially when the action’s intent is to encourage people to go further into debt to buy a commodity (real estate is a commodity at this juncture ) that is in such overwhelming supply to demand, it is a marginal investment at best, regardless the incentive. If one takes pause and adds the falling value of the dollar and the inevitable inflation, well, lets just say that the govt is encouraging individuals to urinate on a forest fire with the expectation of not only curtailing the inferno, but to fertilize the ground in the process. The individual is more likely to be incinerated rather than harvest timber anytime soon.
Is it good for buyers? No. Not if they are also taxpayers. Buyers are always better served by a lower overall purchase price than any subsidy that will eventually come out of their pocket one way or another.
This appears to be more a direct result of the NAR's lobby than any concern for “righting “the ship of the general economy. It looks to this auctioneer more like a subsidy for Realtors than a sound investment opportunity for buyers.
Omar P. Bounds III A.A.R.E., C.E.S., G.P.P.A