A toast to Champagne...and the New Year!

Before you pop that cork at twelve bells tonight, take a moment to appreciate the history of Champagne.

The name "Champagne" is derived from the Latin word campagna, originally used to describe the rolling countryside north of Rome. Since the Middle Ages it has referred to the province in northeast France which is known for its production of the bubbly beverage.

The seventeenth century Benedictine monk, Dom Perignon is frequently credited with inventing the process with which the best Champagnes are made, methode champenoise, a unique process where each bottle becomes its own fermentation tank. While how much credit for the invention of champagne should be given to Dom Perignon is still debated, there is little doubt that he was responsible for the concept of cuvee, where different grapes from different vineyards are blended to create a harmonious whole.

The elaborate and time consuming fermentation process, while automated for efficiency, is still used today. So, when you greet the new year, you're toasting with the product of centuries of tradition. Cheers!

Not so fast, Jane

A copy of Jane Bryant Quinn's new book, Smart and Simple Financial Strategies for Busy People showed up in the mail while I was in the Midwest for Christmas. You have to give these media relations folks credit for recognizing the power of blogging. They send a bunch of advance copies to bloggers for review and the resulting exposure a few blogs can give a new book is priceless.

Along with the book were several pages of press material prepared by Meryl L. Moss Media Relations including a list of "Six Automatic Savings Ideas" presumably from Quinn's book. The very first of these ideas is:

• An Employer Retirement Plan. Diverting a percentage of your pay into a personal retirement account (e.g., a 401(k), 403(b), 457, Federal Thrift Savings Plan, etc.) has two advantages: first, there's no income or Social Security tax on your contribution and second, most employers match at least part of the money you put up.

Hold on just a minute. There is Social Security tax on your contributions to retirement plans. I wonder if Jane's book is full of such fallacies.

Headlights and windshield wipers

The weather here in the Great Midwest is 60 degrees and sunny while it's been raining non-stop back home in the Bay Area. Hopefully, all of the California drivers are heeding the new headlight/windshield wiper law that went into effect in July.

From the California Driver Handbook:

You must turn on your headlights if snow, rain, fog, or low-visibility (1000 feet or less) require the use of windshield wipers.

The idea that the legislature felt it is necessary to tell drivers to turn on their lights in the rain and fog raises an interesting question. Are California drivers really that dumb or do the lawmakers just think they are?

Merry Christmas!

The Happy Capitalist will be jetting back to the Midwest to celebrate Christmas with family and friends and blogging will have to take a backseat to holiday gatherings. But the laptop is along for the ride and I'll try to check in from time to time.

In case I don't have an opportunity later, let me wish everyone a very Merry Christmas and a Happy New Year!

Money can buy happiness but...

Money actually can buy happiness but only if you have more of it than your peers. A recent study by Glenn Firebaugh, Pennsylvania State University and Laura Tach, a graduate student at Harvard, concludes that happiness is derived by the things money can buy (absolute income effect) or from comparing one's income to the income of others (relative income effect).

Firebaugh argues that, in evaluating their own incomes, individuals compare themselves to their peers of the same age. Therefore a person's reported level of happiness depends on how his or her income compares to others in the same age group. Using comparison groups on the basis of age, the researchers find evidence of both relative and absolute effects, but relative income is more important than absolute income in determining the happiness of individuals in the United States. This may result in a self-indulgent treadmill, because incomes in the United States rise over most of the adult lifespan.

The research puts an interesting spin on "keeping up with the Joneses". Firebaugh tested what he calls the "hedonic treadmill hypothesis" where "keeping up" means continually increasing one's own income because you can be sure the Joneses are increasing theirs.

Also, continued income growth in wealthy countries is irrelevant to the people's happiness because it could cause a consumption race just to maintain a constant level of happiness.

I say, give me the money and let me take my chances.

Cramer's Mad Money

CNBC seems to have a big hit on it's hands with Jim Cramer's "Mad Money". On the evening investment program Cramer runs wild on the set ranting about stocks and taking questions from callers. It's worth seeing...once.

OK, maybe there's some entertainment value to it, but the interesting thing is its impact on trading.

For example, last night's program featured Cramer raving about Sara Lee (SLE) while tossing frozen cheesecake around the stage. In today's trading SLE was up 3.5% on about five times its average daily volume. Apparently, some folks think he's worth watching.

Getting smarter...?

Americans seem to be getting a little smarter about handling their retirement savings, but we still have a ways to go according to a new report by the Employee Benefit Research Institute.

Slightly more than 43% of those who received a distribution from an employer's qualified plan in 2003 rolled the money into an IRA or another employer's plan, thus avoiding the immediate tax bite and penalty. This is way up from the 19% who did so ten years earlier in 1993.

It's likely that people understand the rules better now than in the past or perhaps financial institutions have done a better job marketing rollover products.

It's a big improvement but it's still pretty dismal. Too many people are cashing out lump sums and paying unnecessary taxes.

Vocabulary change for the Fed?

At long last, a Fed meeting to get excited about.

OK, maybe that's a bit extreme but seriously, tomorrow's meeting of the FOMC is the first in a long time that might be a little bit different. Sure, they're going to give rates a 25bp bump, just like the last twelve meetings, but it's the vocabulary that the media will be yammering about tomorrow afternoon. Will the words "accommodative" and "measured" be part of the policy statement?

Many analysts believe that, starting Tuesday, interest rate policy will no longer be referred to as "accommodative", signaling an approaching end to the tightening cycle. Then, after Alan Greenspan's final meeting on January 31st, the phrase "measured pace" will be lifted.

Gosh, the suspense is killing me.

Vote your proxy

In the mid-eighties, when I first started investing in mutual funds, I would usually take the time to vote the annual proxies for the various fund families that I had invested with. But over the years, and since I get so much investment "stuff" in the mail, I've taken a much less active role...actually I pretty much ignore the proxies when they come.

So this fall, when a proxy from Janus showed up in the mailbox, it promptly hit the shredder. But a few weeks later, a second proxy showed up. That's unusual, I thought, but it too hit the shredder. Then a third proxy came. OK, what's the deal?

From InvestmentNews

Shareholders in Janus mutual funds are set to vote at a Dec. 29 meeting on a proposal that would attach performance fees to 13 of its 59 stock and bond funds.

Janus Capital Group Inc. originally had intended to put the proposal to a shareholder vote last month but postponed those plans after failing to get enough shareholders to cast a vote one way or the other.

If the proposal is approved, about $25 billion of the Denver-based company's $139 billion in assets will be linked to performance.

Most hedge funds are set up in a similar manner, where the management fees tick up if performance is above a specified benchmark but this is new for the mutual fund industry. Only about 4% of all mutual funds are set up this way, according to Lipper.

Proponents believe that this kind of structure more effectively aligns the objectives of the fund management with investors. I think we'll be hearing a lot more about it.

KU wallops Cal

As a University of Kansas graduate currently living spittin' distance from the University of California at Berkeley, there's no way I could pass up posting on the thrashing KU gave Cal in basketball today.

The young and struggling Jayhawks trailed by three at the half but poured it on in the second period to beat the Cal Golden Bears 69-56.

Cal was probably fortunate that this game was played at Kemper Arena in Kansas City where the crowds and the noise are a little less intimidating to visitors than at Allen Fieldhouse in Lawrence.

Photo courtesy of the KU Athletics website.

Trademarking "Dykes on Bikes"

Dykes on Bikes are perennial favorites in San Francisco's Gay Pride Parade and I had no idea they were embroiled in such a legal battle over their identity.

A lesbian motorcycle group in San Francisco declared victory Thursday in their fight for a federal trademark for the name "Dykes on Bikes."

The U.S. Patent and Trademark office twice rejected the group's application on the grounds the term "dyke" was offensive and derogatory. The office reversed itself after the group's lawyers appealed, submitting hundreds of pages of additional material that they said showed the slang word does not disparage lesbians.

I'm so happy for them. After all, what could be more fun than hundreds of half-naked lesbians on motorcycles?

Neutral is "of little use"?

Through monetary policy, the Federal Reserve stimulates economic growth or restricts it, based upon its belief about what is in the best interest of the U.S. economy.

The idea of "neutral" refers to a rate that is neither so low that it stimulates excess spending, nor is it so high that it restricts spending and price increases. Most economists agree that neutral is between 3 and 5 percent. Since June, 2004 the Fed has raised its funds rate target from 1% to 4% and is expected to raise the target to 4.25% next week.

Since the Fed has a history of overshooting neutral, Rep. Jim Saxton (R, N.J.), chairman of the Joint Economic Committee of Congress asked Greenspan how he would know when neutral had been reached and whether the Fed might go past neutral.

While neutral "is a useful theoretical construct," practical difficulties "limit its usefulness," Mr. Greenspan wrote in a response released by the committee. Definitions of neutral vary, as do the methods for calculating it, and its level may change with economic conditions, he added.

"It is impossible to know with any certainty when the neutral rate has been reached." Moreover, at times, "when inflation is too high or too low -- aiming for a neutral funds rate in the near term would not be appropriate," Mr. Greenspan wrote.

Sorry Alan, but it is important to have an idea where neutral is, it's not just a "theoretical construct".

It's time for Alan to be done. He's done a respectable job, but we can do better.

Bigger butts, bigger needles

Apparently our butts have become so large that longer needles are needed to deliver the appropriate dose of medicine in some injections.

Standard-sized needles failed to reach the buttock muscle in 23 out of 25 women whose rears were examined after what was supposed to be an intramuscular injection of a drug.

Two-thirds of the 50 patients in the study did not receive the full dosage of the drug, which instead lodged in the fat tissue of their buttocks, researchers from The Adelaide and Meath Hospital in Dublin said in a presentation to the annual meeting of the Radiological Society of North America.

That's enough to get me back to the gym.

Choppiness defined

When I wrote only yesterday that we should expect a choppy market through year-end, I had no idea that today would prove to be such a great example.

The trading day began with a U.S. productivity report that was very positive and stocks responded as one might typically expect with such a good economic report. By around 3:00 est the Dow was up 101 points and the S&P 500 had risen eleven. Then the computerized sell programs kicked in and investors followed giving up nearly all the the day's gains. The Dow finished up 21.85 and the S&P 500 up only 1.61.

And while many positive economic reports can be interpreted as inflationary, positive productivity reports are much different. Productivity is total output divided by hours worked, so a strong number implies that inflation is pretty much in check. The same number of workers are producing more goods in the same amount of time. But after a few hours to digest the info, the market sold off anyway.

Expect more of the same as the month winds down.

Expect a choppy December

November's strong performance for equities has moved the Dow to just about even for the year and we're up about four points on both the Nasdaq and S&P 500. So, what factors moved the market last month and what should we expect from December?

In my view, the recent upturn was driven by the following factors:

• Solid third quarter earnings reports.
• Oil dropped from $70 per barrel and has stayed below $60 for weeks.
• Solid consumer confidence numbers suggesting a strong retail holiday season.
• Lower inflation expectations.
• The expectation that the Fed is near the end of its tightening cycle.

Regarding the Fed, we'll most likely see two more 25bp hikes, which is probably two more than necessary given the Fed's history of overshooting neutral. The result will be a sluggish 2006 economy with the chance of a negative GDP growth rate in at least one quarter. By the end of the new year the Fed may have to contemplate a reversal in interest rates.

With this remaining uncertainty about the Fed in the near term, any good economic news will cause worries that the Fed's tightening is unfinished and drive stocks down while negative economic news would trigger the opposite.

My forecast is for a choppy market through the end of the year. A Dow above 11,000 this year is looking about as likely as a white Christmas in San Francisco. Oh well.

Smart money?

Registered Investment Advisors polled last month by Rydex had a slightly upbeat outlook on the economy and the stock market. Now you just have to ask yourself if you should follow the "smart money" or if this is actually a conta-indicator?

(Click on the graphic for a larger image).

The Happy Capitalist Turns One

Tomorrow, December 3rd, The Happy Capitalist will turn one year-old. It's hard to believe that a year can go by so quickly.

I won't be around to help celebrate as I'll be in San Francisco taking "The Big Exam" all day. The blog will just have to celebrate by itself...I hope it throws itself a nice party.

More importantly, tomorrow is my mother's 80th birthday. Happy birthday, Mom!

Neglected nest eggs

A recent study by the mutual fund giant Vanguard Group suggests that investors don't pay much attention to their retirement savings and often don't diversify well.

The fund firm looked at more than five million people with employer-sponsored defined-contribution plans or individual retirement accounts that it administers and found that during the first six months of 2005, only 10% of investors in the defined-contribution plans and 8% of IRA owners made any trades within the accounts.

Vanguard also found that a large percentage of IRA owners and defined contribution plan participants only invest in a single asset class or a single mutual fund.

While it's true that many investors are not well diversified, here's the important thing to note about this particular study: the sample was 5 million Vanguard clients. Vanguard, as a financial services provider, attracts clients who want to invest on the cheap. Its customers want low fees and no help. They have been convinced by the popular financial media that the most important aspect of investing is price, the cheaper the better. Service and education are lower priorities. Is it really surprising that their accounts are in such sad shape?

Rumsfeld gets it

The mainstream media are having a heyday with Rumsfeld's declaration today that the enemy in Iraq are not "insurgents". He's late to the party but he's absolutely right.

From the SF Chronicle:

More than 2 1/2 years into the Iraq war, Donald H. Rumsfeld has decided the enemy are not insurgents.

"This is a group of people who don't merit the word `insurgency,' I think," Rumsfeld said Tuesday at a Pentagon news conference. He said the thought had come to him suddenly over the Thanksgiving weekend.

They are guerrillas, they are terrorists, they are lowlife scum of the earth, they are assholes, but they are certainly not insurgents.

Webster defines insurgent as, "Rising in revolt against established authority, especially a government." These cowardly half-wits with explosives don't have the sense to understand revolt. The only thought in their heads is that killing innocent civilians somehow makes them great in the eyes of Allah. Huh?

Black Friday and Cyber Monday

I don't recall ever hearing the phrase "Black Friday" so much as I've heard it this year. It refers to the day after Thanksgiving when so many retailers finally go into the "black" for the year. And this is the first year I've heard the phrase "Cyber Monday", referring to the quantity of online shopping done on the Monday following Thanksgiving. But it's apparently significant.

The Monday after Thanksgiving, nicknamed "Cyber Monday," is the unofficial kickoff of the Internet holiday shopping period. It has become a huge online shopping day in part because after a long Thanksgiving weekend of comparing prices and exchanging gift ideas, many shoppers return to the high-speed Internet connections in their offices ready to buy electronically.

Online Christmas sales already had jumped over the four-day Thanksgiving weekend. Americans spent $305 million online Friday, up 22% from the same day a year ago, according to research firm comScore Networks. Research firm Nielsen/NetRatings said its Holiday eShopping Index, which tracks traffic to 100 Web sites, jumped 29% Friday from a year earlier.

Both traditional and electronic retailing is off to a rapid start this holiday season. Will it hold up?

We're shakin'

About ten minutes ago, the house took a pretty good jolt. From the USGS website:

Magnitude 2.4
Date-Time Monday, November 28, 2005 at 05:37:32 (UTC)
= Coordinated Universal Time
Sunday, November 27, 2005 at 9:37:32 PM
= local time at epicenter
Location 37.840°N, 122.22°W
Depth 5.6 km (3.5 miles)
Region SAN FRANCISCO BAY AREA, CALIFORNIA
Distances 2 km (1 miles) NNE (15°) from Piedmont, CA
5 km (3 miles) E (85°) from Emeryville, CA
5 km (3 miles) N (3°) from Oakland, CA
18 km (12 miles) ENE (67°) from San Francisco City Hall, CA

These coordinates put this little temblor on the Hayward fault about a mile from our house. These days we're thinking that these small releases are keeping the really big shifts from occurring. Why would anyone live in a place like this?

Ka-ching!

The American consumer continues to be the strongest leg of the U.S. economy even with the dampening effect of higher energy prices. From the WSJ:

Charge-card company Visa USA reported retail sales using its cards rose over 11% to $3.7 billion for Friday and Saturday, from the same two-day period last year. Sales of electronics, books and CDS jumped 21%, while specialty-retail and hobby sales increased 16% and discount and drug-store sales climbed 10%.

Solid retail sales through December could be just the ticket to propel the Dow above 11,500 by year-end.

Built to last

Less than a year out of college and living in my first real apartment, one of my first "major purchases" was a Weber Kettle for around 50 bucks. I was sleeping on a bed that I bought used in college for $25, I didn't own a sofa and my TV was a 12-inch black and white, but I had to have a grill.

Pictured above is yesterday's Thanksgiving turkey on the very same grill I bought in the spring of 1981. It has spent its entire lifetime outdoors, uncovered. It's been used at least weekly, rain or shine or bitterly cold. Yes, I've been known to shovel a path out to it to roast a turkey or tri-tip or just plain ol' burgers.

Yesterday Mrs. THC suggested that someday it might have to be replaced. I don't know...I think it might have another 25 years left in it.

Big Exam

The Big Exam is just ten days away. Maybe afterward blogging can return to its former regularity. In the meantime I'll be spending all of my time with books and the HP 12C.

What can Brown do for you?

I was working in our home-office this evening when I was startled by something hitting the front door--hard. I ran to the front door only to see a UPS truck driving off. It was obvious what had happened. The driver had thrown a package and hit the front door, probably without even getting out of the truck. UPS would have to hear about this. I couldn't believe it.

I called the main UPS customer service number and spoke with a nice woman who agreed that this was not how their drivers are trained. She was very apologetic and promised that I would hear from someone at our local distribution center.

Not fifteen minutes later I received a call from a local supervisor who was also very congenial and apologetic. He admitted to me that this driver had other problems and he wasn't terribly surprised by my complaint.

So I asked, "Why is this guy still on your payroll?"

I got a two-word answer, "He's union."

"What? You've got a driver pissing off customers and you can't fire him?"

"It's really hard. You have to have a lot of documentation before you can even think about going to the union to try to get rid of him."

The supervisor thanked me for taking the time to report the problem and said he'd discuss it with the general manager of the facility but I got the impression that it wouldn't go any further. Actually, I'm even a little fearful of retribution, this driver is on our street every day.

How did labor unions become so powerful that thoughtless and irresponsible employees are protected? There may have been a time in America when unions served a legitimate purpose, but aren't we beyond that now? Shouldn't a business be able to fire someone who is an embarrassment and a liability?

Go long French autos

Go long French automakers. In the eighteen days of rioting in France, more than 7,000 automobiles have been destroyed.

Since the wave of violence started, the daily damage report posted by the French police has been a car owner's nightmare: 502 burned on Friday night, 463 the previous night, 482 the night before that, and so on.

No other country in Europe immolates cars with the gusto and single-minded efficiency of France. Even during tranquil periods, an average of 80 vehicles per day are set alight somewhere in the country.

These cars will have to be replaced and, most likely, will be replaced with new Renualts, Citroens and Peugeots. Looks like a good year for French autos.

Vanguard raises minimums

Vanguard is tripling the minimum investment required to open an IRA from $1,000 to $3,000, and doubling the minimum on Education Savings Accounts, from $1,000 to $2,000.

"It's unfortunate, to say the least, that one of the best-run mutual fund companies in the country is pricing itself out of the market for middle-income investors," Barbara Roper, director of investor protection at the Consumer Federation of America, told Phillyburbs.com.

This isn't surprising. As the expenses that go along with servicing small investors increases we'll see more and larger minimums. It's a real squeeze for firms like Vanguard--they loose money on small accounts and, as investors acquire more significant investable assets, they leave to seek professional help from full service firms. It's no wonder Vanguard has started courting financial advisors at the big brokerage houses.

Load up the truck!

Two years ago Californians fired Governor Gray Davis, only nine months into his second term and hired Arnold Schwarzenegger. It was all about fixing a broken system. Voters demanded reform.

Yesterday the voters of California said, "just kidding".

Californians defeated all eight propositions at voting booths yesterday. Arnold's "top props", Propositions 74-77 would have taken steps to reform state politics and California's sad schools.

Under Prop 74, school teachers would become tenured at 5 years instead of 2. Why should they get tenure at all?

Prop 75 would have made labor unions get employees' permission before making political contributions with their union dues. Doesn't that make sense?

Prop 76 would have placed reasonable, responsible limits on state budget growth. Oh no, not responsible spending!

Prop 77, endorsed by all the major newspapers in the state, would have stopped politicians from drawing their own election districts and made redistricting the responsibility of a panel of non-partisan judges. There's no reasonable explanation that this one failed.

They all seemed pretty sensible but they all went down in flames.

We'll be loading up the truck and heading back to Kansas but first, I want to see what life in California is like under our third actor-governor, Warren Beatty.

Wine country foliage

On our last trip to Sonoma County we were accompanied by our good friends Vavoom and Mrs. Vavoom. So naturally, this weekend we thought of them often as we ate and drank our way through the Russian River Valley. This beautiful tree outside our B&B made us think of them even more as they are now residing in New England, famous for its foliage. How does this compare, Vavoom?

U.S. Housing: A soft landing?

Last week we took a look at some pretty compelling evidence that the U.S. housing market is a bubble ready to burst. There is already a great oversupply in housing, the Fed will overshoot neutral causing the yield curve to invert and high energy prices will have a profoundly negative effect on the U.S. economy. The combination of these factors will cause a "perfect storm" for the housing market.

Today, we'll examine the argument that prices will moderate but supply will not dramatically outpace demand and the market glides in for a perfect landing.

Housing
In this scenario, both demand fundamentals (household formation from immigration and population growth) and affordability (interest rates and wages) continue to prop up home prices. While the supply of new homes for sale is currently at 4 1/2 year highs, this supply level will remain manageable because long-term interest rates are still close to historical lows, the rate of new ARMs is declining and a pullback in the use of home equity loans has begun.

A Steepening Yield Curve
While the Fed has raised the discount rate 12 consecutive times, from 1% to 4%, and could continue to tighten, there is no danger that the Fed could "overshoot neutral". Even if rates rise another 50-75 basis points, that would not be restrictive for growth. There will be no yield curve inversion and we may, in fact, see inflation creep upward.

Energy Prices Moderate
While higher prices, especially for natural gas this winter, will be economically dampening, this will be temporary and manageable. We've already seen oil prices fall significantly and they will continue to moderate and stabilize below $60/barrel.

Provided that these factors hold true, a bubble-bursting dramatic decline in housing prices is not likely.

Data from the October 27, 2005 ML RIC Report

Russian River Valley

The Russian River Valley is one of the finest grape growing and wine making regions anywhere and this weekend we're taking some time to relax here.

This year, 57 wineries are participating in "A Wine and Food Affair-Tasting Along the Wine Road". It's a weekend full of food and wine--pretty tough duty, but somehow we'll get by.

Off with their thumbs...or whatever

The mayor of Las Vegas has an interesting solution for the city's graffiti problem.

Las Vegas Mayor Oscar Goodman has suggested that those who deface freeways with graffiti should have their thumbs cut off on television.

What do you suppose he would have done with rapists?

Allies and Molotov Cocktails

From the San Francisco Chronicle:

An anti-Bush demonstration in San Francisco ended with the arrest of several people, including one who was found carrying several Molotov cocktails after such a device was thrown at The San Francisco Chronicle building on Wednesday, police said.

Just a couple of points: First, how much sense does it make to protest war by throwing bombs? Secondly, lamebrain, the Chronicle is on your side.

Stansky surrenders helm at Magellan

Fidelity announced today that Robert Stansky, long-reining manager of the Magellan Fund, is retiring but his legacy may be clouded by the fund's faded performance.

Magellan, a $52 billion fund has consistently underperfomed the S&P 500 during Stansky's tenure. The fund has averaged a 6.85% total return over the last ten years while the S&P 500 averaged 9.49%. Critics debate whether a fund of Magellan's size can be managed by one person.

Footnote: When Peter Lynch took over the fund in 1977 it had only $20 million in assets.

U.S. Housing: A triple whammy?

The debate over the fate of the U.S. housing market rages on and no one can be sure how it will play out but here's a three-pronged argument supporting a bubble bursting theory.

Supply and Demand
It's a simple case of supply and demand. Housing starts, annualized, have exceeded two million units for six consecutive months which has only happened three other times in modern history. Household formation last year was much lower than it was during any of the three other periods. The result is an oversupply in housing that is beginning to be evident. The backlog of unsold new homes has moved to a 4.9 month supply, the highest since December of 1996.

Yield Curve Inversion
The Federal Reserve has raised rates eleven times in sixteen months and has given little indication of letting up. Over the last three decades there have been eight other tightening periods and the yield curve inverted five of those times as a result of the Fed "overshooting neutral". The U.S. economy slipped into recession as a result of all five of those Fed-induced inversions.

Energy Prices
Energy prices have more than doubled in the last year and, with more than half of American homes heated by natural gas, an impact on consumer discretionary spending is a given. Households have spent $100 billion more on energy this year than last and, while energy prices have eased a bit, we're likely to hit $150 billion by year-end. Add to that the impact of higher short-term interest rates and we can subtract 2-3% from consumer spending. Merry Christmas.

Seem dismal? Later we'll take a look at the arguments for a soft landing.

*Data from the October 27, 2005 ML RIC Report

Bearish on Google

Shares of Google soared past $358 yesterday, more than quadrupling their IPO price from last year. And while the average target price of 22 analysts surveyed by Reuters Estimates is $384.55 for Google, one analyst has a "sell rating" on it and a target of $225.

But Eugene Walton of Walton Holdings LLC in New York reiterated his "sell" rating, although he raised his 12-month price target to $225 from $200.

Mr. Walton runs a one-man independent research firm out of his apartment on Manhattan's Upper West Side. He set up shop after the big 2003 settlement with regulators that required some of the largest Wall Street brokerages to offer independent research to their clients alongside their in-house reports.

How does a guy like this end up being featured in the WSJ anyway? I suppose it's the whole "Man bites dog" thing they told us about in journalism school.

Of geese and homeless people

Lake Merritt is home to hundreds of Canadian geese that have made Oakland their permanent residence. Migratory by nature, these waterfowl have decided there's no reason to leave. Flying south for warmer weather and abundant food just isn't necessary as the weather in Oakland is mild year 'round and the good citizens completely ignore the signs not to feed them.

Oakland's homeless are a lot like the geese. They've just decided to stay because the weather is nice and people feed them. I only wish they wouldn't pee on the sidewalk.

Stuck with Chuck

Charles Schwab says he's staying put as CEO of the company that he founded and that bears his name.

"I will remain here as CEO as long as it takes, but not a day longer," Schwab said. "I will remain as chairman probably indefinitely."

Ya gotta love the "not a day longer" part. My guess is that he's gone before the end of '06.

The second hundred years

Scientists are thawing the remarkably well-preserved body of a WW II airman that has been encased in glacial ice ever since his plane crashed, probably in the 1940s.

FRESNO, Calif. - As the frozen body believed to be a World War II airman slowly thaws after decades encased in a glacier, forensic experts say a picture is emerging of a fair-haired man in an Army uniform who suffered broken bones when his aircraft crashed in the wilderness.

I'm really showing my age, but this reminds me so much of the 1967 sitcom,The Second Hundred Years.

While prospecting for gold in Alaska in 1900, Luke Carpenter, thirty-three years of age, was buried and frozen alive when caught in an avalanche. Sixty-seven years later, Luke's Son, Edwin Carpenter, sixty-seven years of age, widower and retired businessman, is informed of a recent avalanche in Alaska and of a find--his father, alive. Luke was brought to the home of his now aging son in Woodland Oaks, California. Chronologically Luke was 101, but he hadn't aged while in deep freeze and was physically still 33--younger than his own son.

Why do I devote valuable brain space to remembering stuff about a 38 year-old TV show?

Who needs a degree, anyway?

Elizabeth Paige Laurie has returned her degree to USC after being accused of paying her freshman year roommate to do her homework.

Laurie is the daughter of Bill and Nancy Laurie, billionaire daughter of Wal-Mart co-founder, Bud Walton. Bill and Nancy had given the University of Missouri at Columbia $25 million for a sports arena and asked to have it named after Paige. When the allegations of her college highjinks surfaced, MU was forced to take Paige's name off of the project.

"Paige Laurie voluntarily has surrendered her degree and returned her diploma to the university. She is not a graduate of USC," the school said in a statement dated Sept. 30. "This concludes the university's review of the allegations concerning Ms. Laurie."

Call me crazy, but somehow a degree from USC just doesn't seem to mean so much when your parents are worth billions. It's not as if she needs that bachelor's degree to get a job.

Carnival of Personal Finance

This week's Carnival of Personal Finance is up at MyMoneyBlog. Knock yourself out.

Tax cheats

Nine new KPMG officials, including the former CFO, were named today in a criminal indictment on charges of tax-shelter fraud.

U.S. regulators said in a statement this is now believed to be the largest criminal tax case ever filed, which generated at least $11 billion in fraudulent phony tax losses and resulted in at least $2.5 billion in tax evaded by wealthy individuals.

KPMG said in a statement, "All of the nine individuals who received indictments today separated from the firm at an earlier time. Therefore, since the indictments do not involve the firm, it would be inappropriate for KPMG to comment further."

Yeah, since we fired 'em we don't think we need to dicuss it further. In spite of the fact that they (allegedly) designed, marketed and implemented the illegal tax shelters for KPMG clients while employed by KPMG.

Financial Illiteracy

 













A recent poll by the Roper Center for Public Opinion Research reported that the average American family spent $1.22 last year for each dollar it earned and 1.6 million Americans filed for bankruptcy.

According to U.S. News and World Report, 25% of workers age 45-54 have less than $25,000 saved for retirement.

Cardweb.com reports that in 2004, average household credit card debt rose to $9,312 from $7,842 in 2000.

These figures accurately point out that many Americans are financially illiterate. And this concern looms even larger when you consider that we are being asked to take on more and more personal responsibility through tougher bankruptcy laws, consumer-driven health insurance plans, possible Social Security reform and the shift from guaranteed pension plans to defined contribution plans.

An editorial in InvestmentNews suggests that these problems would improve if financial literacy could be raised. While schools have begun to take on this task, they have not embraced it wholeheartedly. It is up to the financial services industry to raise consumers' awareness and help people understand the steps they need to take for their own financial well-being. It's going to take a great deal of hard work.

Vintage fire

This is the sort of fireside scene one expects if the fire resulted in the loss of loved ones or pets or perhaps the family home. But this was really bad. The sobbing and shocked expressions stem from the loss of something really irreplaceable.

Up to $100 million of California's finest wine was destroyed Wednesday in a huge warehouse fire.

Tens of millions of dollars worth of vintage wine were believed to have been destroyed by a relentless fire Wednesday at a huge Vallejo warehouse that was considered one of the most secure places for wineries and individuals to store prized collections.

The three-alarm fire at Wines Central sent plumes of smoke more than 700 feet high that could be seen for miles. The blaze could not be controlled by firefighters because the Mare Island building -- a 1942 structure that once housed Navy torpedoes -- had steel doors and 3-foot-thick concrete walls and a concrete roof that could not be penetrated.

Part D, what you must know

The long-awaited Medicare prescription drug coverage begins January 1st, 2006 and, if you're a participant in Medicare, you can sign up as early as November 15th. What you must know is that doing nothing is not an option. You need to look at the alternatives and make a choice.

Medicare beneficiaries will be able to choose from at least two of the stand alone drug plans that contract with Medicare to provide the new benefit. If you do not sign up by May 15th, 2006 however, you will pay higher premiums for the rest of your life--to the tune of 1% for each month late that you sign up. Exceptions are participants who are covered by an employer-sponsored plan that is at least as rich as the new Medicare plan. They can stay with that plan as long as they like and will not be penalized for joining Part D later. Weigh your options.

Here's how the drug plan works: The participant pays the first $250 in prescription costs as the deductible. Of the next $2,000 spent for prescription drugs, Medicare picks up 75%, the participant, 25%. So, of the first $2,250 spent, the participant pays $1,136, $386 in premiums ($32.20 per month), the $250 deductible and $500 as the 25% co-pay.

Now is where the plan gets a little strange. It covers nothing from $2,250 to $5,100, the "catastrophic level". Zip, zero, nada. This has come to be known as the doughnut hole. Then, above $5,100, Medicare pays 95%.

The rules are a bit convoluted, just like anything in government. But the plan offers tremendous protection against having to pay huge sums for prescription drugs in the event of catastrophic illnesses.

Sex, lies and doctors

This story has been making the rounds today, but everyone is missing the most important question.

An Oregon woman is suing her doctor because he claimed that he could remedy her lower back pain by having sex with her. There were a number of 45 minute sex sessions, for which the Oregon Health Plan paid the doctor $5,000. Think of it, not only did this guy convince a woman that there was therapeutic value in having sex with him, but he got the state to pay him for his time. Brilliant, except that he lost his medical license and had to spend 60 days in jail.

What I'd like to know now is, how's the woman's back?

We win!

Back in early June I posted about PG&E's 20/20 Summer Savings Program. The utility challenged its customers to reduce their average daily usage of electricity by 20% cumulatively for June through September and those who were successful would be rewarded with a 20% rebate on all electricity used for the period.

Twenty percent is a lot to shave off a household's electrical usage, but they dared us, dammit. So for four months we were diligent about turning off lights and eliminating unnecessary consumption. We won. The September bill came yesterday and it showed a 22% reduction in consumption for the period. Take that, PG&E!

I suspect that the most important steps I took were turning off the seldom-used little refrigerator on the wet bar and unplugging the Insta-hot water dispenser at the kitchen sink. Nice conveniences, but we've hardly missed them.

It also didn't hurt that we didn't run the air conditioner for a single day during the period. We never needed it and we probably only ran it for a handful of days during the same period last year.

I haven't done the math but I don't think our rebate check will amount to more than $75. Oh well, it wasn't about the money, it was about the challenge!

Bloggers' Paradise

Imagine, free internet access anywhere in San Francisco.

Google Inc. has offered to blanket San Francisco with free wireless Internet access at no cost to the city, placing a marquee name behind Mayor Gavin Newsom's effort to get all residents online whether they are at home, in a park or in a cafe.

The implications are amazing.

Talking about estate plans

Baby Boomers don't like talking to their parents about estate planning, and for a number of logical reasons. They don't want to appear greedy, they don't want to acknowledge their parents' mortality and they're just not comfortable having such a significant yet stressful conversation with their folks.

But the Hartford Financial Services Group recently released the results of a study suggesting that Boomers should get over their hang-ups and have that chat with mom and dad because it's what their parents really want.

Hartford surveyed older parents ages 70-79 and adults 45-65, primarily Boomers with at least one living parent. Here are the key findings:

• 76 percent of older parents say they are very comfortable with talking about their estate compared to 45 percent of Boomers who say they are very comfortable

• Parents are far more comfortable discussing the content of their wills than their children realize, with 71 percent of parents saying they are very comfortable compared with 54 percent of children
  

• Boomers underestimate the importance that parents place on providing for their heirs, improving their children's lifestyles, helping their children prepare for retirement, and helping grandchildren attend college
  

• Significantly more older parents report having important estate planning documents such as living wills and durable power of attorneys than Boomers report they are aware of
  

• Almost all older parents report talking to their children about their estate plan but fewer Boomers claim to have had this discussion
  

• In general, Boomers say that their actual knowledge about their parents' estate issues is significantly less than their parents claim

What should we glean from all this? Quite simply, have the conversation. Look for an appropriate time and start the dialogue. You'll be glad you did.

Just a tad short

The granddaddy of all marathons is held in Boston every Patriots' Day. To be an official participant, a runner must "qualify" by running another marathon in a specified time depending on age and sex. A few participants in Saturday's Kansas City Marathon are bound to be a bit disappointed.

To the 440 of you who trained hard, tested your endurance and thought you ran a marathon in Kansas City Saturday:

You didn't.

The hilly course that stretched from downtown to Swope Park and back was about .4 mile short of regulation length because of a mix-up at the loop in front of the Liberty Memorial.

The Kansas City Marathon is certain to be thrown out as a qualifying marathon for Boston because of the foul-up. Oops.

"A magnitude 3.2 event"

I heard the loud BOOM in my sleep but it wasn't enough to bring me to full consciousness. The bed shaking and cats flying in all directions got me to stir a bit and then Mrs. THC asked, "Was that an earthquake?"

The U.S. Geological Survey says it was a 3.2 and was located:

2 km (1 miles) NE (48 degrees) from Piedmont, CA
4 km (3 miles) NNE (14 degrees) from Oakland, CA
6 km (4 miles) E (93 degrees) from Emeryville, CA
19 km (12 miles) ENE (70 degrees) from San Francisco City Hall, CA

Gee, those are pretty much the directions to our house.

Top dogs' top firms

The wealthiest Americans have excellent brand awareness of the big investment firms yet many of them favor small, boutique asset management outfits.

These are the findings of the Luxury Institute, a New York firm that surveys the upper 10% of Americans about their preferences. These upper-crusters represent about 11 million households with an average net worth of $2.7 million and they own 77% of all stocks and mutual funds.

The survey indicated that wealthy Americans enjoy the attention lavished upon them by boutique wealth management firms and the independence of their advisors.

They were asked:

"Which wealth management brands are you aware of?"

• Merrill Lynch 82%
• Charles Schwab 76%
• Smith Barney 73%
• Fidelity 69%
• Goldman Sachs 65%
• Morgan Stanley 65%
• J.P. Morgan Private Bank 62%
• Citigroup Private Bank 60%
• Lehman Brothers 60%
• Bank of America 54%

The carnivals are up!

The Carnival of Personal Finance and The Carnival of the Capitalists are both up at Optimized Living and Willisms, respectively. There are lots of great entries at each carnival and here are two of my favorites:

On the personal finance front, Financial Baby Steps, presents a great baby gift idea from a rather unique perspective. Very creative.

From The Carnival of the Capitalists, Joe Kristan of Roth and Company relays news of a little accident on the San Mateo Bridge that impacts about 30,000 estimated tax payments. Liquified, huh?

(The photo is the album cover from Leon Russell's "Carney" from 1972. I owned it on 8-track).

Widgets and free credit reports

Beginning this month consumers in all fifty states are entitled to a free copy of their credit report from each of the big three credit reporting firms, Equifax, Experian and TransUnion.

Citizens of thirteen western states were privy to free credit reports beginning last December and the privilege has gradually rolled out across the country and is now complete with fourteen eastern states, the District of Columbia, Puerto Rico and all U.S. territories going on-line September 1st.

Signed into law on December 4th, 2003, The Fair and Accurate Credit Transactions Act, is intended to ensure that lenders make decisions on loans based on full and fair credit histories and not on discriminatory stereotypes, to improve the quality of credit information and protect consumers against identity theft.

To be sure, this is a sweet deal for consumers but the CEO of Equifax doesn't see it exactly the same way.

"..It's unconstitutional to cause a public company who has a fiduciary responsibility to return profit to shareholders to give away the product," Chapman said to reporters following a speech at the Commonwealth Club of California in San Francisco..."

He has a point. What if you were in the business of making widgets and Congress comes along and tells you that you must give each American a free widget every year? Oh well, at least your two major competitors have to give everyone a free widget too. So is there anyone left who will actually buy a widget?

Certainly every one of us should check our credit histories on a regular basis to guard against inaccuracies and fraud. But these reports have been easily accessible in the past, usually for less than ten bucks. Anyone serious about protecting their credit wouldn't let a Hamilton stand in their way, would they? Free reports are a good thing for consumers, but is it really right for government to force companies to give away their product?

That said, get your free credit reports at annualcreditreport.com.

Fibonacci, Elliott and the Nasdaq

It was July of 2000 and the Nasdaq Composite had already shed 20% of it's value, from just above 5,000 down to around 4,000. The freefall we had experienced was bad enough but what was still to come was inconceivable.

One of the firm's technical analysts had come to our office from New York to discuss his craft. (Technical analysis employs the use of historical performance to evaluate securities. It uses charts and market statistics to the exclusion of fundamentals like sales, earnings, management expertise, etc. to predict performance).

About a dozen financial advisors showed up to see the presentation and learn something about what our technical analysis department was thinking and see if there was anything useful to cull from the meeting. While most of us believed there was some redeeming value to technical analysis, it seemed a little too much like voodoo or witchcraft to hang our professional reputations on.

Part of the analyst's presentation dealt with Fibonacci Retracements combined with Elliott Waves and the uncanny accuracy this technique produced. One disbeliever asked, from the back of the room, "So, what do your fiba-what-cha-ma-call-it numbers say the market's gonna do?"

The analyst hesitated to respond but finally admitted that his analysis put the Nasdaq at between 1,000 and 1,200. That would be 2,800-3,000 points below it's value on that summer day five years ago and nearly 4,000 points below its high! Unbelievable. People walked out. It was totally absurd to even consider that kind of bloodbath. Impossible.

It took a little more than two years, but in September of 2002 the Nasdaq finally bottomed at just under 1,200, exactly as the analyst had predicted. It makes one stop and think, doesn't it?

The technical analyst who spoke to us that day was Rick Bensignor.

The economics of wages, revisited

The members of the California State Senate apparently were all sleeping during freshman economics.

The state Senate passed a bill Wednesday to increase the minimum wage by $1 over the next two years and tie future increases to the pace of inflation, though it faces a likely veto by Gov. Arnold Schwarzenegger.

On June 13th I posted this after a study was released that suggested that many San Francisco restaurants were moving elsewhere or closing altogether due to the high minimum wage law in the city:

The conventional wisdom for raising the minimum wage, or for having one in the first place, is to help the working poor. It's very appealing to suggest that everyone should have a living wage, however, it's just not that easy.

To understand why such a law is actually harmful to low-wage workers, consider the employers' alternatives. If, for example, an employer is required to pay a worker $9 per hour for work that he values at only $6, he/she has several options. First, the employer could fire the low-wage workers and replace them with more productive employees. Secondly, he/she can outsource to contractors or worse yet, outsource to foreign workers. A third alternative is to automate. An employer can also chose to hire illegal workers who seem to be plentiful and willing to work for lower wages and virtually no benefits. Finally, as San Francisco restauranteurs are doing, they can chose to quit business altogether or relocate to an environment that is more business-friendly.

Shouldn't there be some sort of continuing education requirements for lawmakers? Or, how about some minimum educational requirements?

Carney time

Anyone interested in personal finance or capitalism (two of my favorite subjects) will be amused and entertained by this week's Carnival of Personal Finance and Carnival of the Capitalists. Thanks to Savvy Saver and Rethink(ip) for your hard work.

Disaster drill for financial documents

What if you have only ten minutes to evacuate your home due to rising flood waters, a terrorist attack, a wildfire or toxic spill? Sure, you round up the family and pets, grab the photo albums and whatever family heirlooms you can carry, but what about your financial documents? What documents can you gather in ten minutes? Or would you even think to grab your important papers at all?

In an emergency situation most of us would be too overwhelmed to think about what documents we will need, or even where they are located. So, consider assembling an evacuation bag that you can grab quickly, kept in a home safe or lockbox that contains sealable plastic bags to protect documents from water. A small backpack is ideal since you may end up walking some distance and need to keep your hands free for other things.

Items to keep in the evacuation bag:

• Cash
• Key to your safe deposit box
• Phone numbers for insurance agents, banks, attorneys and financial advisors
• Account numbers for bank, credit card and investment accounts
• Social Security Numbers for all family members
• Current backup of computer files
• Last three years tax returns, federal and state
• Copies of the documents in your safe deposit box (insurance policies, wills, deeds to house and cars and your house inventory)
• Medical information such as doctors' names and phone numbers, prescriptions, immunization records
• Phone numbers for family and friends
• Photocopies of birth certificates, passports, marriage certificates and powers of attorney
  

Cash is listed first on this list because it can be extremely important in a major disaster. ATMs will be out of service as will credit card machines that rely on phone lines for verification. Cash will be king. In situations where people are on their own for days, black markets erupt up for everything from food and water to blankets and clothing. Be assured that the guy selling toilet paper for twenty bucks a roll doesn't take American Express.

It may not be convenient, but consider keeping your safe deposit box at a bank that is some distance from your home. After all, you don't want it to be under the same flood waters as your home.

Keep credit card balances low or paid off. While this is always a good idea, after a disaster you might need to pay for weeks of living expenses before seeing an insurance check or relief money.

What other financial documents might be useful to have with you in an evacutation?

Katrina and Abraham

The CFP Board and the Financial Planning Association have notified members that they plan to offer financial planning help to the victims of Katrina. Certified Financial Planner(TM) professionals are being asked to volunteer to answer victims' questions.

Now, freshman psychology was a long time ago for me but I seem to recall something about a fellow named Maslow and his "hierarchy of needs". On that hierarchy, I'm pretty sure that food, shelter and clothing rank somewhere ahead of things like asset allocation and the tax treatment of capital gains. Katrina's refugees are asking where they will sleep tonight and how will they feed their families, not "Do I have enough international exposure in my portfolio?" or "What are the AMT implications of exercising my non-qualified stock options?"

Perhaps the CFP Board and the FPA are jumping the gun a tad but their intent is noble and I suppose it's better to be prepared too early rather than too late. Eventually the victims' focus will turn to the financial losses they have sustained and there will be important questions to be answered. I have already signed up as a volunteer.

Gasbloggin'

I received this email from an old friend yesterday:

PETITION FOR PRES. BUSH: Presidential Petition--Please do NOT let this petition stop and lose all these names. If you do not want to sign it, please forward it to everyone you know.

To add your name, click on "forward". You will be able to add your name at the bottom of the list and then forward it to your friends. Or, if necessary you can copy and paste and then add your name to the bottom of the list.

PETITION TO LOWER GAS AND DIESEL PRICES IN THE UNITED STATES:

It then asks the 2,000th petitioner to forward it to President Bush and gave an email address. There were over 1,500 names attached.

Now folks, let's get serious. Just what do you expect the President to do about gas prices? He's had it tough enough trying to influence U.S. laws (Social Security, tort reform, etc.) how can he be expected to have any influence over the law of supply and demand?

The price of gasoline has been driven up by the forces of too many dollars chasing too few goods. More precisely, two many dollars, yen, euros and yuan chasing too few barrels of crude. Prices will come down if and when production is increased, demand is decreased, or both.

It's a really great thought that Dubya could slash pump prices back to a buck a gallon with the stroke of a pen or some sort of Presidential proclamation, but it just doesn't work that way. Sorry.

Fruits and nuts, chips and fries

Last week Californians Attorney General Bill Lockyer filed suit for a court order requiring McDonald's, Burger King, Wendy's, Frito Lay and others to warn consumers that french fries and potato chips contain a chemical that may cause cancer.

"In taking this action, I am not telling people to stop eating potato chips or french fries," Lockyer said. "I know from personal experience that, while these snacks may not be a necessary part of a healthy diet, they sure taste good."

But consumers should have the information needed to make informed decisions about their food, he said.

The legal basis for Lockyer's suit is a 1986 ballot initiative approved by California voters known as Proposition 65 requiring the Governor to publish, at least annually, a list of cancer-causing chemicals and requires the citizens of California to be warned of the dangers.

There are hundreds of chemicals on the list including acrylamide, a natural byproduct that forms when certain carbohydrate-rich foods are fried, baked, or roasted at high temperatures. Acrylamide can cause cancer in laboratory animals at high doses, although it is not clear whether it causes cancer at the much lower levels in food. Acrylamide is found in potato chips and french fries.

There are now so many warning labels bombarding the people of California that none of them can be taken seriously, if noticed at all. Virtually any place of business that you enter, from restaurants to retail stores to auto repair shops, all must display various health warnings. The warning signs in parking garages, hardware stores and the crystal department at Macy's all read:

Warning. This area contains chemicals known to the State of California to cause cancer, birth defects or other reproductive harm.

So, instead of posting warning labels on hundreds of products and thousands of businesses throughout California, wouldn't it just be easier to post this message at the borders:

Warning: The State of California contains chemicals known to cause cancer, birth defects or other reproductive harm. Enter at your own risk.

Gas caps

Hawaii's Public Utilities Commissioners apparently were all at the beach when they should have been in Econ 101.

HONOLULU - In an effort to gain some control over what motorists pay at the pump, Hawaii on Wednesday became the first state in the U.S. to set caps on the wholesale price of gasoline.

Any freshman economics student can tell you that price controls discourage production, leading to reduced supply and eventually shortages. Anyone remember the 70's?

Fereidun Fesharaki, an energy expert at the University of Hawaii's East-West Center in Honolulu, said the gas cap was "a stupid idea" that would be bad for competition and, ultimately, consumers.

"It may make one of the refineries shut down and leave Hawaii," Fesharaki said.