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The Blue Money Report
"Keep in mind the three most important aspects of real data analysis: compromise,
compromise,
and compromise."                                   
~ Edward Leame

Welcome to the Blue Money Report

Today's Commentary: 01.03.03
What Have We Learned?

What have we learned as we turned the calendar, celebrated in our own special way (I was in bed at nine on New year's Eve after watching the ball drop in New York via CNN), and made plans to move forward with the regrettable and forgettable 2002 behind us? In all likelihood, it will be very little.

We won't remember what all of those strategists saw at the beginning of 2002 as optimistically as our administration portrayed it through those rose colored glasses of "continued growth". We won't remember that those very strategists were also so optimistic that they failed to see the continued interest rate cuts that Federal Reserve Board found necessary to implement to stave off the possibility of deflation, a word that seemed to gain vigor as the year progressed, would not work to any significant degree. They also failed to see the possibility that equity prices would go lower (!), that bond prices would go higher (!), the administration's economic team designed to speak the words of their boss would opt to speak the truth instead and lose their jobs in the process (!), and that the economy, although constantly being billed as both strong and vibrant, would become even stronger and more vibrant if the incentives for the wealthy in the form of tax breaks(!) were accelerated.

Let's start with equity prices. the Dow Jones Industrial Average found itself on the losing side again. That losing streaks added to the notion the DJIA needs to be realigned yet again to better reflect what used to be industry is more than passing reason for concern. The suggestion that the presence of Microsoft, Intel, and telecom giant SBC Communications weighed the index down for three consecutive years even after the additions were summarily applauded when the Wall Street Journal made the changes. In 2000, the Dow shed 6.18%, in 2001, the number fell even further to a 7.1% decline and the final tally for the year ending 2002 saw the Dow drop another 16.8%.

Too often, this index is looked upon as the template for investors when in fact, the revisions done to the index seem to be less about what is good for the individual and more about what might be the hottest companies at the moment. The WSJ has revised the index 52 times in its 74 year history and the problem that faces investors seems to have preyed on these folks also. What is hot is in, only to find out that hot has a tendency to cool much faster than expected.

The Nasdaq composite index fell 31.5 % by year's end. The corrections of 2000 led to the profit slowdown and recession of 2001 led to the corporate scandals of 2002. Unable to overcome the three factors of a bear market, equity prices fell and in doing so wiped out over the course that time some seven and half trillion dollars in stock market wealth.

As evidenced by the day after the first day of 2003, stocks in all indexes rallied blindly behind the calendar change as if corporate profits were due to increase, business spending was to begin again in earnest, all the while ignoring the fact that consumer confidence continues to drop and unemployment continues to rise.

Bond prices continued higher, except during rallies which drives yields down for fixed income investors. Eleven interest rate cuts did not have the magic needed to stave off economic downturns and they piled up like so many leaves in the gutter. The problems kept backing up even as the economic bad news poured down from every conceivable angle.

Now these interest rate cuts helped keep the economy moving along but only at the expense of refinanced mortgages which is more like borrowing than growing. The downside of these cuts are the interest rates paid on money market accounts and certificates of deposit, the mainstay income for many elderly Americans who want neither risk nor possible capital loss, fell in tandem with each rate cut designed to stimulate the economic landscape. The chance repeat of those double digit returns on Treasuries is not even a possibility, I'm afraid to tell you. What will pick up slightly are the yields. And the possibility that businesses will be forced to spend something next year will be due largely to software support expirations.

The new economic team assembled by the President is every bit as confused a bunch as the previous group. Mr. Snow will do what he was appointed to do, tell us what the President wants us to hear. Will it be based on sound principle and fact? Not anymore than the previous team. But the corporate scandals are sure to subside if there is no one chasing the story. Enough divergent news (also know as our war on terror or Iraq, or whoever has found themselves in the American cross hairs) will keep us busy and ignorant of the real problem. The administration has an ally in the fight, Fox News, who had chanpioned themselves as the leaders in the Republican news reporting. Whatever happened to the Chinese wall between the owners and the journalists that keep reporting fair and accurate.

Which leads me to the tax cuts, again. Later this month, the President will attempt to push through his tax package that is not only partisan and skewed toward those that need it the least, but he will face little in the way of obstruction. The Democrats started failing America in the 2000 election and again in late 2002 as they authorized use of force overseas in Iraq. They will have learned nothing from these failures, their voice losing its volume as the might of those in power continue to bang the drum louder.

Mr. Bush's tax plan is called an economic stimulus package whose purpose seems to be increased deficits and a new higher national debt ceiling. The problem with these cuts lie in the fact that too many shareholders of dividend paying stocks have them nestled away in tax deferred accounts. Too many corporations who are supposed to benefit from this legislation are using every loophole available to avoid paying those taxes in the first place. So in essence, this is no plan for stimulus at all.

The end result: Little growth in 2003, a rise in stock prices over last year (which isn't saying a whole lot about anything), an increase in the bond yield (because there is little room in the other direction), more mumbo jumbo about the economic recovery as the dollar weakens and the war rages on, and of course, our President, keeping the country safe from faceless enemies who would rather grow their personal coffers than spread the wealth among the 80% of those who aren't considered by popular definition to be rich. And you thought the enemy was terror.

Note from the Editor:
I am still optimistic that the upcoming year will be better than 2002. If I seem a bit harsh it is because the folks that could fix these problems have chosen silence over activism, double speak over clarity. I don't sell myself as a journalist, never have and never will, so I am not under their code of ethics. I do not report from press releases nor do I scramble to quote every talking head. I have no master other than my feelings about a subject. I comment on what I feel will effect you as much as it will effect me. To that end, I will continue to hurl my criticisms at those who speak from both sides of their mouths, attempt to dissect those utterances, and to try to make sense of what still makes little sense to the majority of us.

Today's Commentary: 12.30.02
Closing Thoughts...Happy New Year

I hate Christmas letters.
... Almost as much as I hate forecast/nostalgic pieces done around this time every year. Before all of the good news and bad is buried in the archives, it is trotted out for once last look over before it is relegated to the "then" file from the "now".

Christmas letters and New Year's letters all have the same flavor. The former usually contain a list of accomplishments from every member of the family, no paragraph longer than the other, a short list of vacation reflections, and some with the current state of surgeries as well as the plans for the new year.

New Year's notes tend to be full of hope. In the case of 2002, the hope clearly is that this will be the last down year for equities. But it should be full of hope that things will be better in '03, even if the odds are stacked against that happening.

This is my New Year's letter:

Dear readers:
I hope this note finds you well. If you have weathered the increased rounds of layoffs and were able to help keep the economy propped up by spending your equity, bully for you. Your neighbors, who have watched their hopes dashed for re-employment at the same type of job, for the same type of pay, appreciate the false sense of growth you have bestowed on the economy. If it wasn't for you, the signals that this current trend of economic events sent would have been seen for what they really were, instead of an interpretation that mislead voters into thinking the the GOP had it going on when it came to your purse.

I know that I have taken some cheap shots at the Republicans over the past year, always professing to stay away from any other politics that the administration has drawn our country into recently. But the avoidance of topics that cross over from what effects the country and what effects your money is getting increasingly difficult. Every situation President Bush leads us to like zombie eyed followers of a piper, has economic ramifications. Serious and usually long range reactions to what is planned in the near future.

But put those rose colored glasses on because, as my brother pointed out in a recent, somewhat acerbic email, that I should be hailing what the Republican party is about to do for this nation. Perhaps I have rode the high horse of opinionism too long and should, if I look long enough, find the good side in everything.

We have growth, economically and if you look at the negative side, we also have grown our debt to levels not reached since World War II. All this was done in such a short amount of time, it boggles the mind. And Congress, at the president's urging, is about to find new and interesting ways of adding to that deficit for many years.

My brother thinks that the tax cuts are something that should be heralded on high and not trashed as being skewed toward the rich. My thinking is that my brother must, after twenty two years at a major oil company, must be rich. Then from a familial standpoint, the cuts that would effect my and the majority of America's tax bill to the tune of less than 10% in relief, should be supported as something that is good for the economy.

Let's suppose that my brother earns more than $75,000 a year. He would find himself in the lower part of the top 20% of the tax payers in the country. That's right, the bottom 80% of the wage earners earn less the $75,000 per household. President Bush has a plan on the table that would cut taxation of dividends. This simple tax cut would strip the revenue that the government receives by $31 billion, give or take a couple hundred million in loose change, each year based on estimates done by the Citizens for Tax Justice, a group that leans in favor of the 80%. Of that figure, the lost revenue from the 80% group would be somewhere in the neighborhood of $2 billion. Which means that a good many of us are not owners of dividend paying equities. My brother and his fat paycheck brethren would definitely save from the double taxation, first on corporate earnings and then, when the investor receives them. Actually, each group is taxed once. Perhaps that might be why I miss the beneficial points of the proposed tax change. If companies chose to be investors, then that would be the penalty they should pay.

Now I realize that this is soul food for the Democrats. Whenever they can portray a Republican as thinking about the rich rather than the less rich, that simply is too good to pass up. So what I think my brother was suggesting is that we should pull ourselves up by our boot straps, stop complaining about the rich, and become one.

Then we would benefit from not only the dividend tax cuts, but also the acceleration of the tax rate cuts. This would be of an "enormous benefit" to those that share the bottom 80%. If you earned exactly the $75,000 cut-off wage for this group, you could expect to find yourself $48 richer. This, I believe is the step in the right direction that every Republican wants to see. The $48 would be spent on stuff that we probably don't need, but it would hardly be something we would look at as a boost to the bottom line of Family, inc. The combined benefit of a dividend cut and the tax cut would amount to about $130 at the top range of the lower 80% which would help pay for the spring sports for one child, the latest threat from the financially strapped public school systems.

This accelerated tax cut would drain an additional $17 billion from the government's coffers, of which, I have admittedly contributed too little in comparison say, to what my brother has. The combined total for the lower 80% of us is only $1.4 billion. So you can see why parity is a goal among the Republicans. When you even the tax paying playing field, you can't help but skew the handicaps. After all, those top 20% have provided for us slackers for far too long.

But this is the way the economy gets stimulated if you can hear the tune the piper is playing. You can recognize growth as well. When businesses continue to earn more by paying less without producing more, how can this be considered growth?

Perhaps I am being too harsh. 2002 was a wonderful year for me as a writer. This column has done fantasically well, expanding the reach of my words to folks that otherwise might not have popped in on my other website devoted to financial education. This year brought my first book deal with McGraw-Hill, a financial guide that should be available for you next Christmas. Perhaps my brother realizes that I may be on the receiving end of some of those tax benefits after all.

I doubt it will change my tune much. I still don't like expanded debt at a federal level. Raising the national debt level can be linked directly to our president's tax cuts, which I still argue have little to do with economic performance restoration. I will always champion the right of tax payers to pay for what they use when they use it, not relegate those bills to future payers.

As we stand on the threshold of the new year, I really do want to wish you the best.