December 11, 2014

Posted by Koenig Investment on
 December 11, 2014
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Koenig Investment Advisory Market Update – December 2014 

Global oil prices were above $110 per barrel in June of this year.  They have declined to below $70 per barrel since then.  There are a number of factors as to why prices have declined.  Demand for oil has declined in the U.S. as vehicles have continued to be more fuel efficient.  Demand elsewhere in the world has also slowed.  The biggest single factor influencing oil prices is U.S. oil production in Texas and North Dakota.  About 20,000 new wells have been drilled since 2010, increasing the daily U.S. oil production to almost 9 million barrels per day.  In comparison, Saudi Arabia is producing around 10 million barrels a day. [1]

On Thanksgiving Day (November 27th) OPEC held a meeting to discuss oil production from member nations.  A number of members wanted to reduce oil output to help firm up prices.  Saudi Arabia had a different agenda.  They wanted to make no change in oil output in order to push prices lower, inflicting economic pain on higher cost oil producers, specifically the U.S.  In the aftermath of this meeting we have seen oil prices continue to fall and no resolution to these conflicting agendas is in sight.

The global decline in oil prices means a giant wealth transfer of $1.5 trillion.[2]  Funds that would have flowed to the Middle East are now flowing to the United States, Europe and Japan.  The average American who spent $3000 on gas in 2013 may now see an $800 annual savings.1  In the United States we could see some additional growth in 2015 GDP from lower oil prices.  In addition, big oil importing countries like India, Japan and Europe will likely see significant savings and an economic benefit of lower oil prices.

Oil exporting countries like Russia, Venezuela and those in the Middle East will have less money to fund their respective governments.  Russia and Venezuela in particular are being significantly impacted by lower oil prices.  These countries rely heavily on oil exports to balance their government balance sheets.  In January of this year, it took just over 30 Rouble to buy 1 U.S. Dollar, today it takes around 54.[3]  The Rouble losing nearly 50% of its value against the U.S. dollar is a huge setback for Russia.

The current decline in oil prices will impact companies like Exxon and Shell, who will likely reduce their exploration budgets going forward.  Much of the price adjustment burden will fall on the U.S. shale industry.  Harold Hamm, CEO of Continental Resources and a major player in North Dakota’s Bakken oil fields, has said he can cope with oil above $50 a barrel.[4]  In Texas, where wells tend to be closer to existing pipelines, the breakeven on oil production may be somewhat less than $50 a barrel.  If oil prices stay between $65 and $70 a barrel we will likely see production growth slow.  At $60 a barrel production growth could come to a stop.  When oil prices decline, energy firms tend to cut their exploration budgets first, followed by production cuts.  These production cuts will be what help stabilize oil prices.

To give an example of drilling costs, Exxon and Russia’s Rosneft Company recently spent two months and $700 million drilling a single well in the Kara Sea, North of Siberia.  Although successful at finding oil, it will take years and billions of dollars before the project is complete.[5]  In contrast, a shale oil well can be drilled in a week at a cost of $1.5 million.1  Shale oil producers have gained efficiencies in drilling and operations allowing them to significantly lower their costs.  Given the fairly new nature of this business, further efficiencies are likely to continue.

A year out we will likely see a slowdown in shale oil production.  Some frontier areas in shale oil such as Oklahoma, areas outside the Bakken in North Dakota, Eagle Ford and the Permian Basin in Texas will likely be hard hit as companies in these areas tend to be late players with heavily leveraged balance sheets.  Longer term adversity will likely make shale oil producers stronger as it will prompt a new round of innovation in a fairly young industry.  Down the road with a recovery in oil prices, new wells in Texas and North Dakota can be brought online in weeks not years.

We often remind people that in early 2008 oil was roughly $135 a barrel and by the year end was trading near $33 a barrel.  We believe oil prices will continue to be volatile, not seeking a stable price until mid-2015.

While most of our clients do not have significant exposure to oil and gas producers such as Exxon, Shell, etc. we do hold a number of pipeline companies in client accounts.  Oil and gas pipeline companies operate like a toll road.  The major pipeline companies like Energy Transfer Partners, Enterprise Products and Magellan Midstream are largely pure transportation plays where their costs to customers is not related to the price of oil or gas.  Some smaller pipeline companies have oil exploration aspects to their business and the oil price decline has impacted their share prices.  Master Limited Partnerships (MLPs) in the pipeline business have seen price declines because they are part of the energy sector as a whole, not because investors expect to see a significant reduction in corporate earnings.  MLPs remain a strong dividend paying holding that we expect to keep in portfolios for the longer-term.

Overall, we see lower oil prices as a positive, especially to the US, Europe and other developed oil importing nations.

[1] www.economist.com Sheikhs v shale, December 6th 2014

[2]  www.washingtonpost.com Key facts about the great oil crash of 2014, December 1st 2014

[3] www.xe.com USD per 1 RUB

[4] www.economist.com In a bind, December 6th 2014

[5] www.ft.com Rosneft and ExxonMobil strike oil in Artic well, September 27th 2014

November 2014

Posted by Koenig Investment on
 November 12, 2014
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November 2014

Interest Rates

The below graph of the 10-year Treasury rate over the past century puts current interest rates in a clear historical context.  From 1946 to 1976 – a period of 30 years – interest rates steadily rose from 2.19% to 7.74%.  Interest rates then experienced a sharp uptick in the late 1970’s and early 1980’s before receding to a historically normalized level.  Current rates are at lows not seen since the 1940’s.  The graph clearly illustrates that rates are not likely to go lower, but rather to rise.  The wider bond market tends to move in conjunction with Treasury rates.  From 1945 through the late 1970’s the average annual return in the bond market was about 3.5%. From 1980 through 2012 the average annual return for bonds was closer to 8.5%. A bond gains in attractiveness, and therefore value, when its interest rate is higher than the current market average.  Conversely, a bond declines in value when its interest rate is lower than that of newly issued bonds.  Bonds issued at today’s low interest rate will be less attractive than bonds newly issued at higher future rates, meaning these bonds and the funds that hold them are expected to decline in value.  Given rates are likely to gradually move upward – reverting to more typical historic levels – bonds will not provide the strong anchor position investors have experienced for several decades.  Considering these projections, we would be more cautious on bonds over the next 5 years.

chart medium CSource: www.multpl.com

Stock Market Valuations

Many of us remember the stock market decline following the extended technology market advance in the latter half of the 1990’s.  By the late 1990’s many investors only wanted to own technology stocks.  This caused the price to earnings ratio (P/E) of the S&P 500 Index to climb to around 30 near the end of 1999, compared a longer term average of 17.[1]  To date 76% of U.S. corporations that have reported 3rd quarter earnings, reported above analyst expectations.  This is above the long-term average of 63%.[2]  In a few weeks the market will be moving its focus on 2015 earnings. Currently the updated P/E ratio on estimated 2015 S&P 500 earnings is about 15.72.  While a number of pundits speak about an overvalued market, the P/E ratio contradicts this negative market assessment.

Purchasing Managers Index (PMI)

PMI has continued to move up this year, as we reported last month.  Data reported at the end of October showed a 2.4% monthly increase to 59.0.  The index was originally developed by Herbert Hoover as a quick and reliable monthly survey and early indicator of the health of the economy.  Below are a few comments from respondents of the latest survey. [3]

“Holiday orders are exceeding seasonal forecasts. Customers are demanding additional quantities above prior orders. Fuel costs and other positive signals appear to be creating demand above normal.” (Food, Beverage & Tobacco Products)

“Weakness in commodity prices very positive on our business.” (Fabricated Metal Products)

“Outer body material changes in the auto industry means new equipment and manufacturing growth.” (Machinery)

Media

Media often steer dialog to the more negative aspects of any story.  Human beings have a genetic hardwired response to run from fearful events.  The news media understands this impulse well and many outlets rely on fear to some degree in order to hook an audience.  While fear responses originated with reactions to predators in the wilderness, it does not end with our move to modern societies.  A person investing for retirement who is uncomfortable observing their account balance decline on a day-to-day basis is often responding to this same danger stimulus.  It can be difficult to sort probability from possibility in all manner of situations.  Part of our responsibility as your advisors is to help filter out media noise and provide relevant market information to help you decide what real risks are for you, versus possibilities that are unlikely to ever occur in reality.

A recent perusal of financial headlines was cause for mirth within the office.  You may have recalled the oil price spike in spring 2012.  Article titles from the time called up scenarios of doom and gloom.  One would think a decline in oil prices, as we are currently experiencing, would result in happy headlines.  Not so.  According to various articles oil prices are “swooning”, “slipping”, “sliding”, etc.  Here are a few headlines related to the drop in oil prices:

Falling oil prices put pressure on Russia, Iran, Venezuela – Washington Post 10/20/2014

Oil Prices: Will the slide hurt the US shale boom? – The Christian Science Monitor 10/23/2014

Is the Cascade in Crude Overdone? – Investing Daily 10/24/2014

Oil Prices Slip on High Supplies – Wall Street Journal 10/24/2014

Markets are constantly in flux.  Every change results in a mixed bag of winners and losers.  The media has a habit of focusing on the losers and forgetting, or downplaying, the winners in any given situation.  While this attitude may help make it easier for us to identify situations to avoid or alter, it often leaves us without the knowledge of positive gains from changes in economic events.

Master Limited Partnerships (MLPs)

In mid-October we saw MLPs in the oil & gas pipeline sector incur higher than usual market volatility.  Energy Transfer Partners a large pipeline company, was trading around $64 a share on October 6th.  By October 15th it had traded down to $53.50.  Just a week later it was back above $64.  Many other pipeline stocks experienced similar price moves. During this time period we saw a broad market selloff of more than 5%, with oil prices sinking 12% in October and more than 25% since the summer season.[4]  Markets were driven down by heavy selling in the broad energy sector as investors were concerned about profitability of oil & gas exploration companies.  Hedge funds further contributed to the selloff in MLPs as some were forced to sell in order to cover their margin balances.[5]  The benefit of MLPs in the pipeline sector is that their profits come from transporting oil and gas, not exploration, meaning profits are less dependent on higher oil prices.  We believe the October selloff in oil and gas pipelines was an overreaction and has since corrected itself.  We maintain our belief that pipeline MLPs are a strong longer-term position providing steady income.

Summary

We tend not to hear from clients during market advances, but see an increase in client contact during market pullbacks.   When viewing account balances on a daily or weekly basis one must keep an appropriate perspective, knowing investments are meant to be held for a longer time period.  Declines are common in the stock market, and many are short lived with little fundamental relevance.  Do you recall the pullback of August 2004?  How about June 2006 or September 2011?  While each of these declines did affect investors at the time, these temporary pullbacks have faded from memory for the long-term investor.  Our office had been expecting the market correction we recently saw for several months.  We feel this pullback is now over and are looking forward to what corporate earnings, GDP, manufacturing data, and other economic metrics are indicating – a period of mode

[1] www.multpl.com S&P 500 PE Ratio

[2] Thomson Reuters, Proprietary Research Earnings Aggregates, (October 31, 2014)

[3] ISM, Manufacturing ISM Report on Business, October 2014

[4] Morningstar

[5] Virtus Investment Partners, What Happened to MLPS, October 15, 2014

October 2014

Posted by Koenig Investment Advisory on
 November 10, 2014
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October 2014

Global stock markets are in a selloff with the epicenter being in Europe.  The global recovery since the great recession of 2008-2009 has been slow all around.  Economic growth in Europe continues to lag the US which it has historically.  The decline we are currently seeing is not a repeat of the 2008-2009 recession where we experienced catastrophic failure in the credit markets.  I will share several data points I monitor that highlight the difference.

Gross Domestic Product

Data reported by the European Commission shows that the 18 euro countries had zero real growth in the second quarter of 2014.  German factory orders declined 5.7% in August and German Real Gross Domestic Product (GDP) is zero or slightly negative.  In comparison the U.S. second quarter GDP came in at positive 4.6%.  The weak European economic data, although not a surprise, is weighing on stock exchanges and may be an indicator that current European policies are not advantageous for economic growth.

Manufacturing

The Purchasing Managers Index (PMI) is reported monthly and is an indicator of the overall health of the manufacturing sector.  Over the last year the U.S. index has been gradually moving up.  In comparison, China and Europe, countries which more heavily rely on manufacturing have reported near flat PMI numbers. 

graph B

Corporate Earnings

Corporate earnings is a key driver to market returns.  If you asked a CEO in 2008 about their earnings outlook, many answered with uncertainty.  Since then corporations have steadily increased their earnings-per-share, many reporting record highs in 2014.  This is illustrated in the below chart from 2008 through 2014, representing 10 of the 30 corporations in the Dow Jones Industrial Average.

Earnings-Per-Share (Yearly)               *Projected
2008 2009 2010 2011 2012 2013 2014*
General Electric (GE) 1.97 1.18 1.14 1.33 1.38 1.46 1.67
DuPont (DD) 2.78 2.03 3.28 3.57 3.77 3.88 4.01
United Technologies (UTX) 4.96 4.58 5.03 5.35 5.36 6.22 6.84
Procter & Gamble (PG) 3.42 3.47 3.67 3.87 3.85 4.02 4.22
Microsoft (MSFT) 1.87 1.69 2.10 2.64 2.72 2.74 2.60
Intel (INTC) 1.10 1.17 2.01 2.53 2.13 1.89 2.23
Boeing (BA) 4.79 1.87 4.20 4.80 5.00 5.84 8.27
3M Co (MMM) 5.17 4.69 5.75 5.96 6.36 6.72 7.46
Home Depot (HD) 2.17 1.18 1.63 2.03 2.47 3.07 3.76
Source: MarketSmith

In summary, U.S. corporations are in good shape.

Deficits

The U.S. budget deficit as a percentage of our GDP is another important metric.    The government was operating at a 10% deficit in 2009 but the latest figures for the 3rd quarter shows a deficit of just 2.9%.  This is a level we saw in the late 1980’s through the mid 1990’s.  The U.S. government budget equates to roughly 35% of GDP while in Europe it has historically been much higher, closer to 50%.

graph A

Banking Sector

Since 2008 big banks have rigorously shored up their balance sheets at the bequest of the U.S government, accomplished through government backed loans and increased liquidity and risk measures.  Europe on the other has not gone to such lengths to strengthen their banking industry.  A weaker banking system coupled with the larger percentage of government spending in Europe has proven to be a strain on European economic expansion and the overall ability to recover from a recession.

A recession is defined by a decline in GDP for two consecutive quarters or longer.  The U.S. is obviously not in this situation.  We don’t have extenuating circumstances – such as a credit crisis – that leads economists to believe we are even approaching a period of economic downturn.  We are seeing a correction, which is a periodic part of the stock market.  Europe has some worrying economic fundamentals but the U.S. is in a far different position.

One bright spot in the recent selloff is oil prices falling to a five-year low, with gas prices at the pump following suit.  A one-cent reduction in gas prices equates to $1 billion per annum in consumer savings. [1]  We would expect to see some of this savings funneled into other industries such as retail, especially as the holiday season ramps up.

Please feel free to contact the office at your convenience with any questions you may have.

[1] Wall Street Journal, Global Oil Glut Sends Prices Plunging, (October 14, 2014)

February 2014

Posted by Koenig Investment Advisory on
 May 9, 2014
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Plow Horse Economy

The mainstream financial press has been inferring that 2014 will be a real improvement for the U.S. economy. I think the data we’re seeing so far is more indicative of a plow horse economy—slow and steady. While many companies are reporting nice profits for the latter half of 2013, their guidance for 2014 is best termed as “cautious.” Companies are generally expecting to see positive earnings growth for the coming year, but it is modest growth they are projecting.

Two months (December and January) of weaker employment reports and a slowdown in both manufacturing and housing suggest the economic takeoff many pundits have been predicting for 2014 is wishful thinking. Weather-related issues may be causing some of the slowdown, but broad data seems to point to issues beyond weather. This does not mean the U.S. economy is headed for another recession, but rather that we are likely to continue to see slow, modest growth.

General Economy

The average monthly U.S. trade deficit figure for 2013 was $39.3 billion, compared to $46.4 billion in 2012.1 A decrease in the trade deficit is a positive for the economy. Decreased oil imports and oil-related exports are clearly making a difference in the trade data. Although trade data has been headed in a positive direction recently, the progress has slowed. Trade exports are a significant portion of GDP.

Auto sales have been a large positive in the U.S. recovery. This is quite a turnaround for an industry that saw near bankruptcy for giants Chrysler and GM in late 2008 and early 2009. Recent data is showing some slowing in sales. This is to be expected. The market saw pent-up demand that has now eased.

Unemployment continues to ease. The past year saw the 3-month average for year-over-year private sector employment growth hover around the 2.0% mark all year.2 Most Americans would like to see greater growth in employment. The numbers do show jobs being added within the economy every month. Again, this is not at a robust rate, but it is one more example of an economy that is steadily improving, albeit slowly.

Federal Budget News

The Congressional Budget Office (CBO) released its semi-annual 10-year budget outlook in early February. This report shows the deficit shrinking both in raw terms and as a percentage of GDP over the next 2 years before shifting to a moderate rate of increase. Current projections through 2024 show a budget deficit no larger than 2013 in terms of a percentage of GDP. The 2013 deficit came in at 4.1% of GDP. This compares to 6.7% of GDP in 2012 and 8.4% in 2011. Higher taxes and lower spending forced by the sequester both contributed to this lowered rate. For those who think the deficit cuts are all smoke and mirrors, I would point out that 2013 government spending declined 2.3% and tax receipts increased by 13.2%.1

January Effect

Statistical analyses of the stock market show an interesting trend related to activity early in the year. The Stock Trader’s Almanac is known for the maxim “As goes the S&P 500 in January, so goes the year.” While this may seem to verge on fortune telling, there is actually good, mathematically sound reason for this maxim. By the most critical of criteria, the maxim has held true 76.2% of the time for all years since 1950. There have been 24 down Januarys since 1950. Those years then have an average market decline of 13.9% for the entire year. Probability does not mean a situation is set in stone. For example, 2010 saw the S&P 500 decline 3.7% in January yet ended the year with a 12.8% gain.3 However, the multi-decade trend has been that years with negative Januarys are years in which the market does not perform well.

What does this mean for you as my client? I continue to look for companies that I believe are undervalued in the current market environment, including much of the financial sector. My comfort zone remains with master limited partnerships (MLPs), more conservative mutual fund offerings with an emphasis on income, and companies with a high degree of predictability in their earnings. I do expect to see interest rates rise so will continue to look for shorter-term bond exposure and avoid long-term bond holdings.

Summary

I feel the broad stock market got a bit ahead of the fundamentals in 2013. Current price/earnings ratios are in line with historic norms. However, earnings guidance released by many major corporations shows investors should have subdued expectations for growth over the coming year. As has been the case during much of the recent recovery, the U.S. economy is not behaving as a dynamic racehorse but rather as a slow and steady plow horse. While it may not be as exciting as a racehorse, the plow horse economy does serve a purpose and is helping the economic lives of Americans. The levels of growth are not what many would like to see but are good compared to what much of the rest of the world is seeing right now.

Please note that our 2014 ADV does not contain any material changes. Please contact LorrieAnne (lorrieanne@koeniginvestment.com) if you would like a copy of our 2014 ADV Part II (narrative) or the entire 2014 ADV filing.

 
1) Economic Rocket Ship Still Stuck on the Launch Pad, 02/08/2014, Robert Johnson, morningstar.com

2) Bureau of Labor Statistics

3) Briefing.com, 1/31/2014, The Big Picture, Patrick J O’Hare

 
The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

November 2012

Posted by Koenig Investment on
 November 28, 2012
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Housing

A number of recently released housing statistics show continued positive progress in this sector. The most recently released Case-Shiller Index shows improvement in 95% of U.S. markets.1 Home prices are up an average of 2.1% over the previous year. Sales of existing homes in October were up 10.9% from October 2011. October saw 2.14 million existing homes on the market, the lowest level since February 2006. Lastly, November home builder confidence jumped to its highest level since 2006.2 The general consensus amongst economists shows growing optimism regarding this sector. It is now becoming common to hear that we have passed the bottom of the housing dip.

There is a pent-up demand for housing from both delayed household formation and caution towards entering the housing market. Analysts have been keeping a watchful eye on the sector as a change in these behaviors is expected sooner rather than later. Housing starts in the spring of 2013 will be eyed carefully as they are a bellwether of builder confidence. There is a fair degree of optimism within the economic reports related to housing; however, this optimism can only be described as guarded.

Domestic Oil Production

“The U.S. Is the New Saudi Arabia”

You likely have seen a headline or two similar to the above. Due to modern innovations such as horizontal drilling and hydraulic fracking, domestic production of oil and natural gas has increased dramatically and is expected to continue to increase. Recent reports point to the U.S. producing as much oil as Saudi Arabia by 2020.3 Having this much oil come from North America would simplify the buying process. The current Middle Eastern oil producing countries often have stability issues. For example, the recent ramp up in conflict between the Palestinians and Israelis could escalate and affect the ability of regional exporters to ship oil to the United States. Greater domestic production means less worry in times of instability.

Tax Collection

The focus in Washington, D.C. has now shifted from the election to the budget. While the budget discussions continue, there is an issue I haven’t seen addressed in the general media. Even though we have seen weak employment growth, tax collections have ramped up considerably since the recession. The government received about $2.5 trillion annually in 2006 through 2008.4 This dropped to about $2.1 trillion in 2009 and 2010. The federal government’s fiscal year ends in September, meaning final 2012 figures can now be calculated. A recent Congressional Budget Office (CBO) release of these 2012 figures shows about $2.4 trillion in revenue received, a return to pre-recession levels.5 The increase has come from both corporate and individual taxes. This is not an expected change given the continuing high unemployment rate and slow corporate recovery. While federal revenue has returned to pre-recession levels, governmental expenditures have not.

Fiscal Cliff

It is impossible to have an economic newsletter at this time and not mention the “fiscal cliff.” Deadlock within the government has led to budget agreements that have been temporary in nature rather than permanent. These temporary fixes are set to expire at the end of the year, dramatically changing a budget landscape by returning tax rates to 1990’s levels. If no agreements are reached by the end of the year then all categories of taxpayers will see their rates return to levels paid during the Clinton Era. Government spending will also return to Clinton Era levels. We would see all taxpayers pay higher taxes, Medicare payments reduced to doctors, significant defense spending cut, cuts to educational programs, etc. Industries and citizens linked to the military would be hit especially hard as defense comprises a large portion of federal spending. In short the economic landscape would be rolled back to a 1990’s scenario. It would have a greater impact on middle income Americans than is desired by any side of the fiscal debate. That impact is what the various parties are negotiating to avoid.

Going over the fiscal cliff is not an apocalyptic scenario for the country as a whole. It would significantly increase tax revenue and reduce governmental expenditures, particularly in defense. It would definitely address the deficit issues that have been created since the 1990’s. The problem is that it would not do so in a smooth and measured manner. You may recall that a 2% reduction in social security payroll taxes was instituted during the recession. This is 2% of a wage earner’s annual income, thus giving a 2% boost in take home pay targeted to lower income households. It is one of the items that would be rolled back without a budget agreement. Current dividend and capital gains taxes would increase to levels present in 2000. Capital gains tax rates would rise from 15% to 25%. Dividends would return to being taxed as regular income. The defense industry is based on current military spending, which would decrease. The list of categories of businesses and individuals who would have to adapt rapidly to a greatly changed landscape is quite long. While it is too early to tell what shape a budget agreement might take, Congress is widely expected to address the fiscal cliff issue before the January 1 deadline.

Future

The government continues to spend more than it receives, creating historically abnormal deficits. The situation has exaggerated during the drop in the economy. The CBO’s November 8th Monthly Budget Review notes a 1.7% decrease in outlays for 2012. Outlays have fallen from 24.1% of GDP in 2011 to 22.8% in 2012. This is still above the 40-year historical average of 21.0% though. From 2011 to 2012, spending on Medicaid dropped by 9%, unemployment benefits by 24%, defense by 3%, and interest on public debt by 3%. However, these positive trends were offset by some substantial spending increases. Increases in TARP spending were greater than the savings from unemployment, defense, and interest payments. Increases in social security and Medicare were far greater than the savings in Medicaid.6 And while the deficit grew by less than it had the previous year, it still grew. This is not a sustainable course of action.

Morningstar recently published a conversation with four economists from the University of Pennsylvania’s Wharton School of Business, a well-respected school. While they noted the short-term fiscal cliff issue, they were each more concerned with long-term economic stability. The causes of the current deficit were their main concern. Issues they have identified are Medicare and Social Security reform, tax code reform, mortgage market (including Fannie Mae and Freddie Mac), and cooperation within government. Some of the issues of interest they noted are:

Medicare & Social Security – There were 5 non-elderly adults in this country for every person over 65 in 2010. This ratio will change to 3 non-elderly for each person over 65 by 2030.7 The working populace cannot sustain the current level of payments to retirees. This issue is tricky as the elderly will need to receive an adequate level of support. Some proposed ideas are greater use of technology in medical administration, limiting eligibility for medical testing, limiting access to unproven and expensive medical procedures, increasing the cap on taxable social security wages, and other controversial issues. Reducing outlays while preserving services for seniors will be difficult but is necessary.

The Institute of Medicine noted in September that about 30% of every medical dollar spent in this country is wasted.8 The head of Medicare and Medicaid from 2010 through 2011 has noted that those programs hold true to this figure and estimates the cost at $150 billion to $250 billion for taxpayers.9 The five main causes of waste are overtreatment, preventable errors and mistakes, complex and cumbersome administration, regulatory burden (in part to prevent lawsuits), and fraud.

Tax Code Reform – Upper income earners will likely be paying higher taxes in the future. However, allowing top marginal tax rates to revert to pre Bush-era levels will only address a small portion of the deficit as this will only raise an average of $85 billion per year over the next 10 years.10 The deficit is projected to be near $1.1 trillion for just 2012, meaning the upper income tax increase will only address about 8% of the deficit.4 Allowing capital gains and dividend tax rates to revert to pre–Bush-era levels would generate $8 billion, or less than 1% of the deficit.11

The U.S. corporate and individual tax codes are in need of revisions as they have decades of lobbyist-induced tax breaks for a wide variety of items. Each deduction has someone or group who benefits, though. It is hard to get lawmakers to agree to remove these items in reality.

Mortgage market – While the national housing situation has improved, it is still a significant black mark on the economy. The average credit score of rejected applicants for loans backed by Fannie Mae and Freddie Mac is 760.7 This is higher than the average score of accepted applicants in previous years. Lenders are still unwilling to loan to many sectors of the populace. Investors are still largely unwilling to hold mortgage-based securities (MBS). In fact, annual issuance of MBS has dropped from over $1 trillion in 2005 to about $1 billion currently.7 This stagnation of the housing sector is a drag on employment recovery.

Future

Unemployment is still high at near 8%. Underemployment is harder to track but is undoubtedly at a far higher rate. Tax increases on upper income earners are likely at this point. These increases have to be accompanied by reductions in spending. While it is heartening to see budget deficits decreasing and smaller than projected, we are still running record high deficits every year. We cannot continue to spend significantly more money than we receive in tax revenue. While some revenue changes can and will occur, there is a limit to how much tax increases can be expected to contribute to reducing deficits.

1) http://themortgagereports.com/11684/case-shiller-index-suggests-strong-start-for-2013-housing-market

2) Housing Industry is Looking Better, Los Angeles Times, November 20, 2012

3) Saudi America, The Wall Street Journal, Review & Outlook, November 12, 2012

4) The Hard Fiscal Facts, The Wall Street Journal, Review & Outlook November 12, 2012

5) Monthly Budget Review Fiscal Year 2012: A Congressional Budget Office Analysis, October 5, 2012

6) Monthly Budget Review, Congressional Budget Office, November 7, 2012

7) What now, Mr. President?, Morningstar, November 7, 2012

8) Report: US health care system wastes $750B a year, Yahoo! News, September 6, 2012

9) High Level of Waste in Health Spending, Says Medicare and Medicaid Boss, http://www.medicalnewstoday.com, December 5, 2011

10) http://www.moneynews.com/Economy/Investors-US-Tax-Deficit/2012/10/22/id/460856

11) The Big Picture, Briefing.com, November 20, 2012

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

Some clients have commented on the declining frequency of newsletters from our office over the past year. We have had to shift some resources in order to deal with changes in our internal business structure due to a combination of business growth and industry-wide regulatory changes. We do feel newsletters are an important communication tool to help keep clients abreast of current economic issues and are looking at ways to restore the frequency to former levels. We do appreciate your patience as we address this issue. There are a number of economic issues I find interesting at the moment, including some positive economic developments.

June 2012

Posted by Koenig Investment on
 June 5, 2012
  · No Comments

A Plow Horse Economy

            “We call it the Plow Horse Economy . . . it ain’t gonna win the Belmont,

but it ain’t gonna keel over and die either.”1

This opening line from a recent economic commentary piece thoroughly sums up the current situation. The U.S. economy is plodding along and will continue to do so for some time.

We are seeing a number of positive, albeit only slightly positive, metrics in relation to the U.S. economy. U.S. households carried $100 billion dollars less of household indebtedness in the first quarter of 2012 as compared to the first quarter of 2011.2 U.S. banks have seen earning rise for 11 straight quarters.3 Credit is gradually returning to U.S. consumers with banks easing requirements on auto and consumer loans. Auto sales in May 2012 were up 17% from May 2011 per Wards Automotive Group. Retail sales continue to hold up particularly well, especially at discount retailers like Target.4 Even the housing sector is looking better with housing starts in the first four months of 2012 coming in 24% above the same time frame in 2011.3 Toll Brothers, a publicly traded residential home builder, saw recent quarterly profits above analysts’ estimates as new home orders grew 47% from the same time period in 2011.5 All of these examples show the U.S. economy not only not sliding downwards, but actually improving in many areas.

 

Unemployment

Let’s look at some of the current challenges in the U.S. economy. Unemployment remains historically high. Productivity gains are a major factor in this continuing area of concern. Companies were forced into efficiency evaluations during the recession. They had to cut payroll and thus streamline processes. While consumer spending has picked up since the recession, we have not seen a congruent increase in hiring. The efficiency gains made by companies means they are continuing to do more work with fewer employees. Additional sales are being absorbed by the more productive current workforce. Unemployment is likely to continue to be an area of concern as employers continue to reap the rewards of changes made during the cost cutting of the recession.

That said, jobs are being added. May payrolls were revised down to an increase of 69,000 jobs, but that is still an increase of 69,000 jobs in the economy. The participation rate in the labor force rose from 63.6% to 63.8% during the same month.6 This is still a relatively low rate – and far too low to reassure someone job hunting – yet it is still a gain. As with a number of areas of the economy, the job picture is brightening, but at such a slow rate that it is hard to see the change.

Europe

The banking sector in Europe is at the heart of the continent’s continued economic problems. U.S. banks went through a government mandated financial strengthening process beginning in 2009. This process forced banks to write down or write off bad loans to local and regional home builders, to small businesses weakened by the recession, and make other similar accounting adjustments to bring their books in line with the changed reality of the economy. European banks did not go through such a process. For example, a local builder in Spain would have been allowed to refinance debt in 2011 of the same principal amount as in 2006 without any recognition of the loss in value of the land and houses used as collateral against that debt. We are now seeing banks in Spain, Italy, and other countries in increasingly challenged circumstances as the fall out of bad loans is affecting the financial solvency of each nation’s banks.  Allowing the banks to fail is not an option in many cases. The failure of a large institution would then lead to the failure of another holding debt linked to that bank. A chain reaction could lead to the failure of the majority of the banking system. The countries involved need to craft a bailout plan – similar to what the United States did – in order to retain banking capabilities. The problem is that the governments involved lack the necessary funds.

German led calls for austerity in order to fund bank bailouts have much merit. Governments needing to address failing banking sectors do need to find a way to divert resources to their banks. Britain has recently done this, and has seen a healthier banking system emerge as a result. And, austerity plans alone may not be enough to create the funds needed for retaining the European banking sector. There is some talk of an economic “Marshall Plan” targeted at southern Europe being heard in economic circles. While no definitive plan is one the table, the possibility of some sort of Euro bond funded primarily by the U.S. and/or China is likely to be discussed further.

Chancellor Angela Merkel of Germany is also pushing for a European banking authority. While there is currently a European Central Bank, it has no regulatory powers. Each country is currently responsible for oversight of financial institutions within their borders. Spain – and to a lesser extent Italy – have been far too lax and unrealistic in regards to lending practices within their national banks. The centralized authority Merkel is proposing would force these banks to evaluate their debt loads within the context of the current marketplace and force them to truly value their loans. Bad debt will be have to be written off and noted as loss. While this will not be a pleasant task (as U.S. banks can attest to) it is a necessary step in dealing with the effects of the recession and moving forward in Europe.

Lastly, we have Greece. An upcoming election in Greece is largely pitting older members of society wishing to preserve assets accumulated over a lifetime by working within the Eurozone against younger citizens with no assets or job to lose who would prefer to strike out on their own. It is understandable that different sectors of society would have different views on the matter. It appears the country as a whole is more likely to follow the direction of those who wish to remain within the Eurozone, but this is not entirely clear. There are some difficult decisions to be made in Greece, and it remains unclear which direction the country will take.

Summary

There is nothing exciting about the current state of the U.S. economy, yet it does continue to grow. The housing market continues to slowly regain footing with reports of increased starts. There is continued job growth, albeit at weak levels. The overall economy is still on track for about 2% annual growth for 2012.7 In sum, this is a picture of an economy that is alive and growing, but at lower levels than in past economic recoveries. This, combined with a recent rocky past, has left many investors nervous. While there are certainly areas of concern within the U.S. economy, we are well out of the recession. A recent pessimistic downgrade of the future bumped up the chances of recession last year from 10% to 15%. That means this particular analyst – with a pessimistic take – still largely believes that we will see growth next year and gives only the slightest chance of economic downturn. This is not the robust growth most would like to see, but the economy is continuing to plod along and get the job done.

 

1) Speeding Up the Plow Horse, First Trust Monday Morning Outlook, June 4, 2012

2) http://www.businessweek.com/news/2012-05-31/fed-says-household-debt-fell-0-dot-9-percent-during-first-quarter

3) http://www.businessweek.com/news/2012-06-04/growth-slowdown-seen-for-third-year-in-u-dot-s-dot-dodging-a-recession

4) http://www.dailyfinance.com/2012/06/01/consumer-spending-rose-0-3-in-april-despite-weak-income-growth/

5) http://www.bloomberg.com/news/2012-05-23/toll-brothers-reports-second-quarter-profit-as-home-sales-rise.html

6) http://data.bls.gov/timeseries/LNS11300000

7) http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

January 2012

Posted by Koenig Investment on
 January 20, 2012
  · No Comments

Year in Review

If we look back at 2011, it began on a high note and had a rough middle, but finished on a more positive tone. GDP for the first three quarters came in at an annualized figure of 1.2%.1 While the 3% fourth quarter estimate being widely predicted will help the year’s overall numbers, it will not be anywhere near the 3-3 1/2% economists widely forecast at the start of the year.

Due in part to the sluggish growth noted above and in part to worries over world events, the S&P 500 finished 2011 almost exactly where it began the year. The stock market moved positively during the first 4 months of the year, then reversed course. Strong tornados hit Alabama and Missouri. Japan was hit by a tsunami which significantly damaged a nuclear plant. The debt ceiling issue played out mid-year, after which Standard & Poor’s downgraded U.S. Treasury debt. Europe grappled with financial issues which impacted both their stock markets and ours. By mid-year, bearish news of a recession for the United States dominated the air waves. I would note that in the 26 years I have been in the investment business, I have noticed that bearish market calls appear to receive the heaviest press coverage. This year was no different.

I look at the investment environment like a scale – with positive items on one side and negative ones on the other. I do currently see more weight on the positive side than the negative. On the positive side, the U.S. is seeing a number of new oil and gas drilling techniques that have unlocked large amounts of natural gas. So much gas has hit the market that prices are now close to a 10-year low. The United States is now also a net exporter of oil-based fuels (gasoline, diesel, jet fuel, etc.)2 – a change of which most Americans are still unaware. Other positives include new technologies like the internet cloud, tablet computers, and smart phones – all of which are increasing productivity and output. The Federal Reserve is very accommodative, meaning they are keeping interest rates low and allowing for easy access to lent capital. Federal spending is actually declining as a percentage of GDP.3 The housing decline that started in 2006 seems to be closer to its final stages. Lower real estate prices have increased affordability. As with much in life, these positives do not stand alone.

The increased affordability of housing has come at the cost of equity loss for many homeowners. While government spending in relation to GDP is slowing, it is still too high. While an easy Federal Reserve boosts growth, it will cause inflation down the line once the stimulus is pulled back. Most economists do not foresee a return of the high inflation levels of the late 70’s and early 80’s, but an increase of a more moderate level once we see upside pressure on wages and real estate – which would seem to be a few years out.

2012

I believe we will see 2012 come in with GDP growth in the 2 – 2 1/2% range, with gains in personal income and spending. I think stocks will move higher in 2012, based on an expectation of a durable U.S. economic expansion. It is being widely predicted that Europe will enter a recessionary phase. While this is likely, its impact on the U.S. economy is likely to be minimal. About 10% of the U.S. GDP is exports. Of our total exports, less than 20% go to Europe.4 Another way to look at this is that exports to Europe make up less than 2% of the U.S. economy. Some large banks do have exposure to European debt and have been reducing their exposure to European debt due to the changes seen over the past year. However, this debt exposure is concentrated to five giant bank/brokerage firms – Goldman Sachs, Citicorp, Bank of America, Morgan Stanley, and JP Morgan Chase. Exposure to European debt outside these companies is very limited within the U.S. banking sector.

The coming year is likely to look much like the previous – slow, but steady growth. While fears of a double dip recession have largely been forgotten and we are in a growth cycle, this is not robust growth. We are likely to see another year of positive, but incremental, change. Relatively high levels of stock market volatility are likely to remain as investors see slow growth and retain fears prompted by the recent recession. I expect to continue to focus on dividend-oriented businesses that do not rely on discretionary purchases as I search for appropriate investments for your portfolio. While 2012 is unlikely to be a banner year for the market, there are a number of underappreciated assets for the prudent investor to find.

1) We Were Too Optimistic, First Trust, 1/3/2012

2) http://www.forbes.com/sites/sap/2011/12/04/inside-americas-energy-export-boom-10-key-insights/

3) http://www.marketwatch.com/story/till-debt-do-us-apart-2012-01-17

4) http://www.ustr.gov/countries-regions/europe-middle-east/europe/european-union

 

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

November 2011

Posted by Koenig Investment on
 November 15, 2011
  · No Comments

Foreign Trade

There has been a fair amount of press commentary speculating on the European debt situation pushing the U.S. economy into recession.  However, the actual numbers suggest a different perspective.  Exports to every other country on the globe only make up slightly more than 10% of the U.S. economy.1  Exports to the European Union comprise less than 2%!2  Third quarter GDP growth was 2.5%.3   This means that even if all exports to Europe were to be stopped immediately (which is not going to happen), we would still see U.S. GDP rise by about 1/2% annually. 

 History shows that adverse conditions in the economy of a major trading partner do not necessarily impact U.S. corporations.  Japan’s economy has been ranked third or fourth largest in the world the past few decades (behind the U.S., Europe, and now China).  You may recall the severe Japanese downturn of the 1990’s.  It lasted the entire decade and affected all portions of the Japanese economy.  Although they were a major trading partner of the U.S. at the time, this downturn was not measurably felt by U.S. corporations during that decade of domestic prosperity. 

 Japan is also an excellent example of catastrophe failing to materialize.  I recall a number of pundits declaring the March earthquake and tsunami would drag the Japanese economy into recession and pull the U.S. economy along with it.  The reality has been far less dramatic.  The earthquake occurred in mid-March.  It did disrupt the Japanese economy and we saw second quarter post negative GDP.4  The third quarter has posted growth of 1.5%.4  That’s an annual rate of 6% GDP growth!  The earthquake’s impact on the U.S. economy seems to have been limited to delays in the supply chain for auto makers and dealers, computer companies, and the like.  These issues appear to have passed.

 I am not suggesting that the U.S. economy would be completely immune from a European downturn.  I am saying that U.S. exports to Europe are a very small part of the overall U.S. economy.  A European downturn is not likely to significantly alter U.S. exports  and, thus, significantly change or alter our economy as exports are a small portion of GDP.

 Changes in Europe

Europe does have a severe situation that needs to be addressed.  Both Italy and Greece have now seen changes in leadership.  The new ruling governments are expected to make significant changes in the fiscal picture of each nation.  Government spending must be reduced in both countries.  The only way to keep each country from spiraling into chaos is austerity measures.  It appears that the new faces of government in Italy and Greece are taking their responsibility seriously and will make the needed cuts. 

 Spain and Portugal are the other two countries with notably high debt levels in the Eurozone.  Spain saw flat GDP numbers for the third quarter.  Portugal has seen another quarter of contraction.  While not at dire levels, Portuguese third quarter GDP has come in at -1.6% annually.5  Further austerity measures are needed in each of these countries as well, but the situation is nowhere near as critical as for Greece and Italy.  Spain does have an important election coming up this weekend (November 20).  The party that is currently leading in the polls is promising to shake up government and make the changes needed to address Spain’s economic situation.

 All of the countries mentioned above have structural changes beyond government spending levels that need addressed.  Opening a business in much of Europe is a laborious process that requires substantial time, and often money.  While this system protects entrenched interests of varying types, it quashes innovation.  This is a well-known issue within economic circles.  It is hoped that the new governments will make changes in areas such as permitting & licensing, indemnity bonds, etc. that will allow new businesses to be created and contribute to their economies.

 There is some good news coming from Europe.  Ireland has contained its fiscal crisis and will not need further support from the EU.  Ireland’s fiscal troubles were mostly caused by state guarantees of national banks deeply involved in an Irish property bubble rather than conventional government overspending.  However, the government was still on the hook for bank losses and had to pass austerity measures in order to lower debt ratios and contain the damage.  Irish GDP is now growing.  In fact, the third quarter shows an annual GDP growth rate of 6.5% for Ireland, compared to just 0.8% annually for the Eurozone as a whole.1 Due to this growth, Ireland has recently announced plans to exit the Eurozone bailout machinery. 

 Much of the European economic picture will depend on how quickly and thoroughly the Italian and Greek governments address their debt levels.  The change in leadership is an excellent sign of priorities shifting towards seriously confronting the fiscal issues within these countries.  It remains to be seen whether these countries will look to their changing reality as a push to creatively work smarter and better, or if riots will dominate the public response. 

 Summary

We have heard a number of pundits declare we are on the brink of financial ruin for the past 2 years.  You would think that being wrong so many times would be cause for pause and reflection.  That does not appear to have happened as many of these same loud voices are still searching for new ways to imagine the financial collapse of the nation.  Reality shows U.S. economy still improving. 

 It’s easy to get distracted by turmoil in Europe or noise from politically based domestic events, but the overall economic news for the country has not changed recently.  Unemployment numbers are consistently coming in better than expected and being revised downwards (meaning there are fewer unemployed workers than previously noted).  Retail sales figures for the third quarter have come in better than expected, but confidence remains low.6  The country is not roaring back to growth, but neither are we sinking into another recession.  Below is a list of a number of relevant data points:

  – Earnings growth for the S&P 500 in the 3rd quarter was 17%, with 12% expected for 2012.7

 – Retail sales increased by 1.1% in September, the highest rise in 7 months.8

 – Industrial production and factory output both saw increases, albeit at modest levels.9

 – Capacity utilization increased slightly.9  While still a bit below the long-term average over the past few decades, it is slowly working back up to the average.

– Housing starts rose 15% in September (from August), driven in large part to a multifamily construction increase of 51%.10

 – Weekly hours, aggregate hours, and weekly payrolls are all on a clearly defined upward trend.11  The only soft employment sector is state and local government, where tax revenue declines have forced employment contraction. 

 I could list other metrics showing a similar story, but I imagine you get the picture – steady, but measured, growth.  Past recoveries have had more pronounced growth, but this is still a recovery nonetheless.

1)  http://data.worldbank.org/indicator/NE.EXP.GNFS.ZS

2) First Trust Monday Morning Outlook, November 14, 2011

3)  http://www.reuters.com/article/2011/11/03/us-usa-fed-idUSTRE7A057A20111103

4)  http://www.tradingeconomics.com/japan/gdp-growth

5) http://www.marketwatch.com/story/germany-france-buoy-euro-zone-growth-2011-11-15?dist=beforebell

6) http://www.nationalpost.com/related/topics/retail+jumps+confidence+still+fragile/5554610/story.html

7)  Briefing.com, The Big Picture November 7, 2011

8) http://www.census.gov/retail/marts/www/marts_current.pdf

9)  http://www.federalreserve.gov/releases/g17/current/

10)  http://www.census.gov/const/newresconst.pdf

11) http://www.bls.gov/web/empsit/ceshighlights.pdf 

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

November 11, 2011

Posted by Koenig Investment on
 November 11, 2011
  · No Comments

The S&P is up for the week.  It has risen by 1.0% as of today since the October close.

The market has bounced around this week over concerns regarding Greece and Italy.  By the end of the week both countries had announced new political leadership, which the market does like so far.  There is a general perception that the new leadership is likely to deal with economic issues in a more realistic fashion when compared to the previous leadership, which was highly entrenched in both countries.

The other news of note this week was a decline in jobless claims for the week ending November 5th.  New claims are at their lowest level since early April.1

1)  http://www.nytimes.com/2011/11/11/business/economy/jobless-claims-fall-to-lowest-level-since-april.html

October 28, 2011

Posted by Koenig Investment on
 November 11, 2011
  · No Comments

As I had communicated in prior newsletters, the release of third quarter earnings figures has been largely positive news.  We have seen the market rise over the past few weeks in response.  As of this morning Bloomberg noted 323 of S&P 500 companies have released their quarterly earnings.  They summed up earnings figures with the following “Earnings Surprises” chart:

Q3/11

Positive Surprises:            227/323 =  70.3%

0% Surprises:                   32/323 =   9.9%

Negative Surprises:             64/323 =  19.8%

SOURCE:  Bloomberg

http://www.bloomberg.com/news/2011-10-28/third-quarter-of-11-s-p-500-earnings-snapshot-as-of-oct-28.html

Current market optimism is predicated not just on unexpectedly positive third quarter figures, but also on the expectation of future growth in earnings.  There are a number of areas of the economy one can look to when forecasting the future.  One key area is railroad freight volume.  Union Pacific, the largest railroad in the U.S., saw third quarter revenue rise by 16% over the previous year, with earnings rising by 19%.  Smaller national and regional railroads have also been in the news with increasing freight volume driving increasing earnings for the industry.  CSX, Rail America Inc, Norfolk Southern, Kansas City Southern, and CN Rail (Canada’s largest railroad) are just a few examples of railroads making recent news due to increased revenue and earnings.  Similar reports have been coming out of trucking companies, with Knight Transportation showing a year-over-year revenue increase of 18.7% for the third quarter.

A great deal of yesterday’s stock market move reflects optimism over the Euro debt plan that Germany has now agreed to.  European banks are the largest Greek bond holders and have been resistant to the idea of taking substantial losses on these holdings.  This has now changed.  Banks holding Greek debt have agreed to take significant write downs on their holdings – likely 50% – in exchange for European governments agreeing to back the banks in each of their countries.  The exact details are still being worked out, but the major points of the plan have been accepted by the key players involved.  While not a perfect solution, the market is judging this a workable plan that will allow Europeans to take the losses needed from Greek investment and move on.

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