OBAMACARE'S EFFECT ON EMPLOYMENT: “YOU SHOULDA THOUGHT AHEAD!”

7/3/13

The Obama Administration’s decision to delay for a year penalties on employers who don’t provide health insurance to their workers exposes a near fatal flaw in Obamacare…and exacerbates one of business’s biggest immediate problems with the overall program.

As I have written on numerous occasions back when the Affordable Care Act (“Obamacare”) was being formulated, any genuine health care reform has to have three components:

1. Elimination of the ability of people to be excluded from health insurance due to preexisting conditions.
2. Forcing patients to spend more out of pocket for their health care, i.e., to make sure people have some “skin in the game” so they don’t overspend on health care.  Indeed, the major problem with our health insurance system is that the people who receive the service don’t pay for the service and, consequently, spend too much on the “what the hell, it’s not my money” theory.  The same theory is the operative approach in Washington and in every seat of government, but I digress.
3. Separation of health insurance from employment.   That employers pay for their employees’ health insurance is a ridiculous, illogical relic of World War II wage controls and must be stopped.

Whether at least two of the three above could be accomplished without some de jure or de facto government takeover of administering or paying for health care is debatable, but that is another issue. 

Obamacare succeeds in the first goal, does little or nothing for the second goal, and exacerbates the problem that the third goal is designed to eliminate or at least eradicate.  Obamacare ties health insurance even more closely to employment.   The circumstances that forced the Obama Administration to delay implementation of the requirement that employers with more than 50 employees either cover those employees or face a fine exposes this glaring weakness in the Affordable Care Act; i.e., by tying employment and health insurance even more closely, it is an enormous job killer and is especially fatal to lower wage jobs.  Paying health insurance for a six figure employee is not an inconsiderable, but also not an impossibly onerous, burden.  Paying for health insurance for employees who make $10 or $12 an hour adds so much to the cost of employing them that it makes no sense to hire them.   This piece of common sense seems to elude most people in the Obama Administration and, to be fair, in most of Washington.

So the Obama Administration seems to have sobered up and delayed implementation of this component of Obamacare so the wonks can work out the kinks and employers can better prepare for its onslaught.  This preparation on the part of employers may amount to deciding which employees to let go or cut back; let’s hope that the Obama people are starting to figure this out.

But this delay may make things worse in the short run.  One of the problems with Obamacare is that it adds to the lack of clarity (I don’t like the term “uncertainty,” as my regular readers know; life consists of uncertainty and anyone who wishes for certainty will die frustrated, but I digress.) that businesses face when they make decisions.   Now that businesses have to wait another year for this aspect of the law to kick in, and to wonder whether it will kick in, they are faced with more questions…and less incentive to hire more people.

Since most people in Washington, in both parties, have never actually made a living that didn’t involve, er, suckling at the government mammary gland, such simple concepts doubtless escape them.  While such lack of acquaintance with the real world on the part of our public servants is a recurring theme of this blog, it nevertheless merits frequent repetition.

EGYPT: COUNTING THE CARNAGE IN “PEACEFUL” PROTESTS

7/1/13

A few days ago, I wrote about Sunday’s then upcoming protests in Egypt (EGYPT AND MR. MASLOW, 6/2/13).   This morning’s Wall Street Journal (“Widespread Opposition Protests Grip Egypt, 7/1/13, page A7) reported on Sunday’s activities, which turned out to be not as tumultuous as feared…

Although the main protests remained peaceful, the nation’s Health Ministry said five people were killed and more than 400 injured around the country, the Associated Press reported.

Meanwhile, Muslim Brotherhood headquarters in Cairo were set ablaze.  People inside the buildings were seen firing at protesters.

400 injured, five killed, party headquarters being set ablaze as people inside fire on protesters.   This is what passes for “peaceful” protests in the new, democratic Egypt that the western media, politicians, and intelligentsia have foisted on the long suffering Egyptian people.   And, one supposes, “only” 5 dead, 400 injured, and shots being fired out of building set ablaze is what passes for “peaceful” protests in much of what we used to call the Third World.

Just thank God we live in America.

WHAT THIS YEAR’S EMERGING MARKETS DEBACLE OUGHT TO TELL US

6/29/13

Emerging markets stocks have taken a beating so far this year.   The MSCI Emerging Markets Index is down 13% while the S&P 500 is up 13% year to date.  This post, however, is not about emerging markets stocks.  As loyal readers know, I keep a hefty portion of my equity investments in emerging markets stocks (See 6/20/13’s INVESTORS:   HERE’S WHAT TO DO WHEN THERE’S NOWHERE TO GO or…

GIMME THAT OLD TIME RELIGION), but not because I necessarily think they will do well in the six months, year, or even five years.  Yours truly owns a disproportionate dollar amount of emerging market stocks because I think that, over the long run, the growth prospects in those markets are better than the growth markets in the developed world.  I have no idea what the emerging markets will do in the next year or two years, and that lack of a crystal ball bothers me not a whit.

The Wall Street Journal reports this morning (“Air Goes out of Emerging Stocks,” Saturday/Sunday, 6/29-6/30/13) that, in a poll of 165 “money managers at top investment firms” taken last December by Russell Investments, emerging markets elicited more bullish sentiment than any other asset class.  2/3 of the surveyed managers were bullish on emerging markets stocks, which turned out to be perhaps the worst performing asset class.  At least as interesting is now that the emerging markets got pounded despite the professional investors’ bullishness, some of those esteemed pros are now changing their tune and getting bearish, effectively buying high and selling low, which is not the way to make money in the markets.  

The larger lesson has little if anything to do with emerging markets; instead, it has to do with the prescience of professional money managers as a group, a group of which I was a part for many years.   Judging from their not all that unusual huge miss on emerging markets, professional money managers are about as likely as you are, I am, or anyone is to be right about the short term direction of any market…about 50/50.   Perhaps in the wake of the emerging markets call of these esteemed, highly paid money managers, perhaps that 50/50 probability is too generous, but I digress.

 The lesson, it would seem, is two-fold.  First, completely forget about the short term performance of the asset classes in which you are invested or not invested.   The movement of markets, at least in the short term, is nearly completely random, and very, very few people can call those movements no matter how much you pay them, or how much Brylcream they put in their hair.  As I have said ad nauseam in the past, the way to make money in the markets while protecting yourself is to invest for the long term according to your risk tolerances and rebalance religiously.

Second, be wary of financial advisors and professional investors.  There are many (okay, some) very good ones, several of whom are known to yours truly personally.  But there are many more charlatans out there who can do little for you but take your money.  To the extent you don’t want to invest on your own, or, in many cases understandably, don’t feel you are capable of doing so, by all means, use a financial advisor.   But don’t leave your common sense at the door.  And never hire someone to help you with investing based on his or her purported ability to call the direction of markets.  As I’ve said before, anyone who thinks s/he can call the markets has not been sufficiently humbled by experience to be entrusted with any of your hard-earned money.

Since this post started out on the emerging markets, I feel compelled to make an observation on those markets, which will not at all affect my generous holdings in those markets.  As of yesterday’s close, the price/earning (P/E) ratio of the aforementioned MSCI Emerging Markets Index was 10.7 vs. the S&P’s 15.7 P/E.  That’s a very wide spread; normally, the S&P has a lower P/E because of the assumed faster growth in emerging markets.   When you combine those numbers with my normally contrarian view of the markets (and of life, but I digress) and consider the newfound bearishness on emerging markets among many in the professional investing community, yours truly is kind of liking those emerging markets.   But that view is no reason to go out and buy emerging markets stocks; I don’t have any idea where those, or any, markets are going for the short or intermediate run…but at least I know I don’t know where markets are going.

EGYPT AND MR. MASLOW

6/28/13

As Egypt prepares for the huge demonstrations planned for Sunday against the Islamist government of President Mohammed Morsi, we are being reminded of the difficult conditions in Egypt, most notably high food prices and a lack of jobs.  

Back in the days when the Egyptian revolt was brewing, I wrote extensively on that revolution in Rant Political and the Insightful Pontificator.   My only post on this topic for Mighty Quinn on Politics and Money was 1/29/13’s EGYPT:  MEET THE NEW BOSS, SAME AS THE OLD BOSS?   My thoughts on the situation in Egypt have changed not at all since the outbreak of the revolution, to wit, such sentiments as democracy, self-rule, etc., etc., may sound fine in the newsrooms and faculty lounges of the West.   But when people are struggling to eke out what we would consider a pathetically meager existence, people simply don’t care what CNN and the faculty at Columbia think is good for them.   They want to work and they want to eat.   Indeed, most of the frustration with Hosni Mubarak resulted from skyrocketing commodity prices in Egypt; increases in the price of wheat were most acutely felt in what was and is the world’s largest importer of wheat.   Simply recall Maslow’s Hierarchy of Needs, which you learned in your psychology, sociology, management, or marketing classes and you will understand what is going on in Egypt and throughout much of the Middle East as the “revolutions” so adoringly covered by the western media leave the populations of the afflicted countries indifferent, disillusioned, or far worse. 

In Egypt, things are even worse.  Not only is the hardscrabble working population left worse off than when the revolution began, but even the starry-eyed, overeducated, underworked scions of the better off who, to the cheers of the West, sparked much of the revolutionary activity, are left out in the cold as their revolution has been highjacked by Islamists.   The people are poorer.  The naïve idle are frustrated.  The nation sinks into dysotpia.   And who is being blamed for the misery?   You guessed it…the United States.  And deservedly so; until we can learn to keep our proboscis out of places where it doesn’t belong (See, for example, only my latest post on Syria, SYRIA AND THE WAR PARTY:  “AFTER YOU GET WHAT YOU WANT YOU DON’T WANT IT…”, 6/17/13), we deserve the derision we get throughout the Middle East and much of the entire developing world.

But western popinjays and poltroons in the media, academia, and “public life” can strut, preen, and declare their allegiance to high minded ideals like “democracy,” a term that not even they fully comprehend.

TREASURY INFLATION PROTECTED SECURITIES (“TIPS”): REPLACING PANIC WITH CALM PERSPECTIVE

6/26/13

As anyone with a pulse who has been able to somehow tear himself or herself away from the “All Blackhawks, All the Time Because, After All, What Could Possibly Be Nearly As Important” coverage here in Chicago knows, bonds have taken a terrific beating of late.  Treasury Inflation Protected Securities (“TIPS”) of which I have been so enamored, and of which I own so many (as a proportion of our total holdings) have been beaten up at least as badly as conventional bonds.  

Some numbers can best convey the carnage in TIPS.   I am using the “closing” 10 year TIP yield (I had to be approximate for 12/10/12 and 6/24/13 on the yields; I’m an investor in TIPs, not a trader of TIPs, and so don’t necessarily follow the yield on a daily basis.) and the closing price of the exchange traded fund (“ETF”) TIP as indicators of levels:

Date                             10 Year TIP yield                     TIP Price

12/10/12 (High)            -1.00% (App)                          123.30

4/5/13 (2013 High)       -0.78%                                     122.57

6/24/13 (2013 Low)     0.60% (App)                            110.02

6/26/13 (Today)           0.54%                                      110.72

Note how tough the last few months have been.   Obviously, I had some doubts about my loyalty to TIPS, especially given the misgivings I expressed in my last post on TIPS, 2/2/13’s YES, I’M STILL HOLDING ONTO MY TIPS and the posts to which it referred my readers. 

But, as I indicated on 6/20/13 (INVESTORS:   HERE’S WHAT TO DO WHEN THERE’S NOWHERE TO GO or…GIMME THAT OLD TIME RELIGION), I have taken no action on my TIPS, or on any of my investment positions, in response to the market turmoil of the last several weeks.  Full disclosure, though…I do have a rebalancing date on Friday and may sell or buy TIPS as part of that rebalancing, but rebalancing has nothing to do with one’s perceptions of the market; it is, instead, the sine qua non of rational investing and must be done religiously regardless of one’s feelings about the market, as I have said and written ad nauseam in the past and will say and write until the day I die.

Besides my aversion to getting emotional and consequently doing dumb things in response to market gyrations, there is another reason I have done nothing on TIPS, or anything else in my portfolios, and do not, on reflection, feel bad about not lightening up on TIP position.  That reason is PERSPECTIVE.

Let’s use the price of the ETF TIP as a surrogate for TIP performance.  I purchased my largest TIP position in three bites…in June, 2004, July, 2005, and June, 2006, coinciding, not at all coincidentally, if you will, with one of my rebalance dates and with my gradualist approach to investing.  I have reinvested all interest payments or, technically, dividends since TIP is an exchange traded fund.   My average price on my TIP position is 104.738, which is, of course, inflated by the reinvestment of dividends at higher TIP prices.   Those 2004, 2005, and 2006 purchases were made at the prices of 102.44, 107.23, and 100.56, respectively.

As can be seen in the numerical array above, TIP closed today at 110.72, considerably above my average price and, more importantly, since these are bonds, I have been collecting, and reinvesting, interest payments along the way.   Further, when I bought those bonds, I didn’t have the expectation that TIP would trade as high as 123.30, at least not as quickly as it did; such price appreciation, when added to the dividends collected and reinvested, would result in an unusually high return a bond investment, or at least for a bond investment in which credit was and is not a consideration.  As loyal readers know, I knew at or about the time of the high that TIPS, like conventional bonds, had run too far, too fast, courtesy of the Fed, and real rates were bound to increase, bringing both conventionals and TIPS down.

So do I wish I had sold my TIPs at or near the high?  Of course, one always wishes one could sell at a high, but, perhaps strangely, I don’t feel bad that I didn’t sell 12 points or so higher. 

Am I crazy?  Why wouldn’t I have liked to have sold something around 123 that is currently trading at 110.72?  The answer is simple:  I am not smart enough to pick the high on anything.   Further, even assuming I got lucky and  picked and sold at the high, I am not smart enough to get back in at a decent entry point.  If I were so “smart” as to think I could trade TIPS, I might have gotten out at 110, a high price relative to my average cost, and gotten back in at 123 rather than the opposite.   So rather than try to do things that I am, and most people are, incapable of doing, I simply held my TIPS position.  In so doing, I have enjoyed a pretty decent return…judging from my 104.74 average price, the 110.72 average price, the coupons, if you will, that I have clipped and reinvested in the intervening years, and the inherent safety of a government issued bond with built-in inflation protection.

Further, at the prevailing yields of 2.54% on the conventional 10 year and 54 basis points (“bps”) on the 10 year TIP, the implied projected inflation rate is 2% for the next ten years.   A lot of people believe that inflation will average less than 2% over the last ten years.  I am not one of them.   On a relative basis, then, I would be a big buyer of TIPS at these levels…if I were inclined to be a trader of, rather than an investor in, TIPS.

IRS SCRUTINY OF 501(C)(4) APPLICANTS: A PLAGUE ON BOTH THEIR HOUSES!

6/25/13

Congressional Democrats yesterday released IRS documents that purportedly show that the special scrutiny the agency gave to applicants for 501(c)(4) status was not limited to conservative groups.  (See my 5/13/13 piece THE IRS, THE OBAMA ADMINISTRATION, AND THE CONSERVATIVES:  LESSONS FROM WHAT SEEMS LIKE YESTERDAY for background on this issue.) While terms like “patriot” and “tea party” were used to flag applications for closer looks, so was the term “progressive.”  It was also learned that groups pushing for one side or the other (or the other or the other, one supposes, but I digress) in the various Middle Eastern conflicts were flagged along with people arguing on either side of the health insurance debate.    

Perhaps assuming that these documents are correct is an inadvisable leap of faith.   They were released in the heat, or at least the intense afterglow, of a bitter partisan battle by a side desperately trying to extinguish an issue that is potentially very damaging to its leader and leaders.  However, those who, like yours truly, have a healthy disdain for both sides of the political preening and primping that masquerades as governance today are as willing to believe one side in any partisan argument as we are to believe the other...not much at all.   But there is no more reason to believe that the documents showing scrutiny of liberal groups were somehow fabricated than there is to believe that documents showing excessive scrutiny of conservative groups were similarly fabricated.  So let’s assume both the new and the old evidence is correct and that the IRS was “targeting” both liberal and conservative groups and groups involved in Middle Eastern politics.   If this is true, I say “Good.”  If I were given to the bouts of emotion that would lead someone to say something like “Hooray,” I would probably say that as well.

Why am I so happy that the IRS was “targeting” for more intense examination liberal and conservative groups applying for 501(c)(4) status?   Applications for such status were pouring into the IRS like water over Niagara Falls.   When the government decides to dispense tax breaks for anything, even the most anti-government groups get in line and push as closely to the front as possible.   Given the deluge of 501(c)(4) applications, the IRS had to winnow down the workload; it had to act efficiently.  I, for one, applaud the efforts of any agency to act efficiently and save the taxpayers some money.   The IRS was simply trying to cull the phonies, or the leaches or the barnacles, in the most efficient way possible. 

Everyone would like to have the taxpayers (i.e., you and I) finance his or her efforts to advance his or her agenda, especially if he can make advancing his or her agenda and opinions a full-time job.   Fulminating beats working for a living, and if one can have the government finance such a sinecure, one has found the career equivalent of valhalla.

There is, however, a larger point here.  As I said in my aforementioned 5/13/13 post,

The IRS doesn’t make the tax laws; the people we elect make the tax laws.  The IRS simply enforces the tax laws and is usually not as unreasonable and unyielding as some would have you believe, but that is grist for another mill.

The best solution to the problem with 501(c)(4) organizations is not to have an  under-resourced and overworked agency find clever ways to work through the pile of applications more efficiently and to winnow out the frauds who are only looking for a subsidy for doing what concerned citizens in a self-governing republic ought to do as part of their civic duty, i.e., advocate for clauses.  The best solution would be to eliminate the 501(c)(4) designation altogether.  Why in the world should one be entitled to a tax exemption if one is conducting an enterprise that is in the business of pushing political positions?   If I want to make my living advocating for causes, that’s my business.   But I am not entitled to have you as a taxpayer subsidize, though the tax code, the organization I have set up to engage in my advocacy.

Like many of my proposals, the elimination of 501(c)(4)s will probably never be achieved.  Our esteemed public servants in Congress and in the White House derive too much benefit from such organizations that serve an ancillary, or perhaps not so ancillary, purpose of keeping these poltroons in office.  Why would Congress eliminate an indirect subsidy to the lifelong larks they call careers, especially when beating up on those who administer the program can provide further avenues for fun, profit, and posturing for the popinjays in Washington?  

To ask Congress to eliminate 501(c)(4)s is nearly as quixotic as asking it to impose term limits.   But that doesn’t make the elimination of 501(c)(4)s and the imposition of term limits bad ideas.

INVESTORS: HERE’S WHAT TO DO WHEN THERE’S NOWHERE TO GO or…

6/20/13

The S&P took a 2.5% dump today.   The Dow and the NASDAQ experienced similar debacles.   Commodities all took gas.  And bonds got pounded.   Rough day for the longs, indeed, especially coming after a similarly rough day yesterday.  Fortunately for the home team, I had some effective shorts (long put positions) in my trading account, but, as I have said in the past, that account is so small as to be laughable; it exists only to focus my thinking for these posts and my usual discourse with friends.   Like everybody else, I took a beating today in the real money accounts, as did everybody else; there simply was no place to go to be long.

What was especially interesting, and somewhat painful for the home team, was that emerging markets stocks performed even more poorly than “domestic’ stocks, whatever the latter might be, but that is grist for another mill.   Some have speculated, in fact, that the cause for today’s worldwide stock market debacle was not so much the Fed as troubles in the financial system of China, the uber emerging market.   I like that theory, though, as I have said in the past, opining on why a market did what it did is nearly as foolhardy as calling the direction of markets.  

Whatever the reason, emerging markets got pounded today more heavily than U.S. markets and have been having a difficult time of it for a lot longer than the last few days.  As someone who has outsized exposure to emerging market equities (roughly 30% of my equities are in emerging market indices), yours truly is especially feeling the pain of the emerging markets.  My problems are being compounded by a relatively heavy exposure to gold and other precious metals, which have also been taking on water of late.  My far greater exposure to Treasury Inflation Protected Securities (TIPS) (See my 2/2/13 post, YES, I’M STILL HOLDING ONTO MY TIPS, only the latest post in which I expressed misgivings regarding TIPS but decided to hold onto them.), which aren’t getting beaten up nearly as badly as stocks but are showing some very stock-like downside, compounds the problem.

So what am I going to do in response to the market moves of late?   Regular readers know the answer to this question:   NOTHING outside my insignificant trading account.   No one knows what the market is going to do; as I said in my 4/16/13 piece S&P YIELDS VS. BOND YIELDS:  I’M YOUR MAN WHEN IT COMES TO STATING THE OBVIOUS.

My important point regarding stocks is that no one knows where stocks are going in any run but the long run and anyone who tells you s/he knows where stocks are going hasn’t been around long enough, or been sufficiently humbled by his or her hubris, to be entrusted with your money.

That point can easily be expanded beyond stocks to bonds and commodities.  So the only way to approach investing is, as I said in my 5/9/13 post OF 10 YEAR TREASURIES AND STEAMROLLERS:  RICH MARKETS CAN, AND DO, STAY RICH.

Calling markets, especially in the short term is, as I have said many times in the past, is very difficult.  There ratio of people who can call short term markets to those who think they can call short term markets is nearly microscopic.  So, at the expense of sounding like a broken record, the best approach to investing is a balanced approach.  Hold some stocks, hold some bonds, hold some precious metals, and hold some cash.  Dollar cost average if you can.  REBALANCE REGLIGIOUSLY.   Let the market do what it’s going to do.  Leave the trading to those who can do it…and those who think they can do it.   Let them provide the liquidity you need to function as a long term investor. 

Nothing that happened today, yesterday, or in the last month or year has changed my long term risk preferences or my long term perceptions of what types of investments would best meet my long term investing goals consistent with those risk preferences.   TIPS, emerging market stocks, high dividend paying domestic stocks, the broad stock indices, precious metals, and some cash all make sense for me and thus all have a permanent, or near permanent, place in my portfolio.    So I will hold them all and REBALANCE, RELIGIOUSLY, from those that are doing well in a given period to those that are doing poorly in a given period.   I will thus achieve my long term goals and save myself a lot of anxiety, of which I have more than enough in other aspects of my life.

Investing can be difficult if one wants to make it difficult by trying to prove how smart one is.  If one is happy staying out of trouble while making decent returns on one’s money and one can display even a modicum of patience, investing is not that difficult.   Remain calm, don’t chase your tail, take a balanced approach, and REBALANCE RELIGIOUSLY.  And if one is not in the business of investing, paying little or no attention to the financial media, at least as it relates to your portfolio, would not be a bad idea, either.