Above is just a short list of positives that have been driving markets in 2012. It’s been a resounding move upwards this year, with just one trading day in 2012 posting a double-digit decline. However, as every financial-related prospectus will tell you, past performance does not guarantee future results.  The real issue is where the market goes from here after such a run-up. Will the Dow challenge its 2007 all-time highs, which Is now just less than 10% away? Or, is the market rally finally running out of steam and due for a broad-based pullback? Of those two questions, I believe we are much closer to the latter, although momentum could still lead us higher in the short-term. Growing risks have so far been digested by the markets, but the tide is turning soon.  The name of the game for the rest of 2012 will be caution. Caution surrounding the geopolitical process playing out in Iran and the potential impact on global oil markets. Caution surrounding the possibility of a Chinese hard landing. Caution surrounding domestic politics as the U.S. economy is scheduled to get hit with what would be the largest tax increase in history to the tune of $500 Billion on January 1st, 2013. Cautioning surrounds Europe as many countries look to be on the verge of or already experiencing a recession. More issues exist, but I’ll focus on the four main cautions above.

Iran

It’s too soon to say when, or whether, the long-standing debate over Iran’s nuclear program will result in some sort of armed conflict in 2012. On March 5th, President Obama continued to stress restraint during his meeting with Israeli PM Benjamin Netanyahu, “There is still a window that allows for a diplomatic resolution.” Western economic sanctions against Tehran, including the scheduled embargo on Iranian oil exports to the EU, have seemed to make a difference in pushing diplomatic negotiations forward as the Iran economy has collapsed. Iran’s rial currency has reportedly declined 60% against the dollar on the black market since December. Iranian inflation, meanwhile, now exceeds 20% a month, according to the Iranian Central Bank, pushing vulnerable citizens back into poverty. The decline in the rial has been aided by a December U.S. announcement that it would penalize companies that do business with Iran’s Central Bank.

If a diplomatic solution is not reached and military action does ensue, the economic effects would be far-reaching.  Iran is the second-largest oil producer in OPEC (2.5 million barrels per day), and a loss of Iranian crude supply would send oil higher, much higher. Jitters over instability in the Middle East have already sent Brent crude 10% higher since the beginning of the year.  OPEC lacks the spare capacity to make up for the loss of Iranian oil, and Iran’s threat of shutting down, even temporarily, the Strait of Hormuz has oil traders worried as 40% of the world’s seaborne oil travels through this body of water.

Whatever happens, higher oil prices and increased insurance premiums on transport traffic through the Persian Gulf would be a drag on the global economy. Commodity analyst Ed Morse predicts that if oil reaches $150 per barrel, it would shave nearly 2 percentage points off of U.S. gross domestic product (GDP), which could tip the slow recovery back into recession.

Judging by the market reaction in 2012, traders seem to think military action will either be limited or is off the table.  However, I expect Iran to become a larger story as Israel increases pressure and the 2012 election nears as Iran will be a hot-button campaign issue. Oil sales earned the Persian Gulf country $73 billion in 2010, accounting for about 50 percent of government revenue, according to the U.S. Department of Energy. This type of reliance on one product could lead to more desperate actions by Iran as the embargo date approaches.  If the regime feels its power or influence is threatened, this will increase chances of an Iranian missile strike or an unleashing of its estimated stockpile of 2,000 mines to choke off access through the Strait of Hormuz. Iran is an issue that is here to stay.

China

The East Asian miracle that has been the Chinese economy during the last 30 years is showing signs of slowing. Whether it’s a sharp downturn (hard landing) or slow deterioration in growth is up for debate. Premier Wen Jiabao announced at the beginning of a national lawmakers’ congress on March 5 an economic growth target of 7.5 percent for this year, down from 8 percent over the past seven years. Data last week showed China’s factory output in the first two months of the year had risen the least since 2009, while retail sales increased less than economists predicted and inflation has eased to the slowest pace in 20 months. Also, foreign direct investment in China has fallen for four straight months according to the Chinese Ministry of Commerce.

While the economic data is showing signs of fragility, the Chinese economy is still growing rapidly and is in a much better position than the West to enact stimulus measures to ensure growth continues. On the monetary side, interest rates can be cut, as China’s central bank has shown a willingness to favor growth even in the face of inflation. In fact, China’s real interest rates have been negative for over two years now. Inflation has been subsiding recently, giving more room for action from China’s central bank. China’s fiscal leaders have also responded to the predicted plunge in European demand, promising bank lending and other aid to struggling entrepreneurs. The government warned last month it faced “complexity and challenges” due to global malaise, and it wouldn’t surprise me to see a large stimulus package enacted this year to stabilize growth. A stimulus equal to about 3% of annual economic ouput seems to be expected by market analysts over the next two years. That amount would be in the range of $460 billion Yuan ($75 U.S. billion). As long as China continues to cool its property bubble in a prudent manner and manages growth expectations well, it seems that a hard landing can be avoided.

Europe

A recession is typically defined as two or more consecutive quarters of economic contraction. Europe is halfway there. The euro zone’s economy shrank by 0.3 percent in 2011’s fourth quarter from the previous three months. Greece, Spain, Italy, Portugal, and Ireland are the most commonly cited countries in recession, but slow to zero growth in other European economies aren’t helping much. The European Commission predicts the 17-member euro zone will enter a “mild recession” and shrink by another 0.3 percent for 2012, citing austerity measures, the region’s sovereign-debt crisis, fragile financial markets and the weakness of the global economy. The recent move (LTRO) by the ECB to prop up the banking system have helped add much-needed liquidity to the markets, but doesn’t change the underlying economic problems in the Euro-zone. Perverse labor rules, pension and other retirement obligations, and challenging demographics still exist and will be large drag on growth.

The Greek bailout is just another example of kicking the can down the road.  Because the average Greek citizen hasn’t accepted the idea that he or she has lived beyond their means for decades, austerity has little chance of success.  Therefore, politicians who promise to end the austerity are likely to be elected, leading to more internal conflict down the road. Eventually, Greece will need to have their own currency which can fluctuate in value with other currencies. This ultimate withdrawal of Greece from the Euro zone will be messy, but it that date looks to be successfully pushed back for the moment.

The current market expectation is that Europe’s recession will be mild. The problem with that thinking is all of Europe appears to be close to a recession or experiencing little growth at the same time. Of course, all of Europe’s economies export heavily to each other. Multiple countries being in recession together is going to have a large impact on those exports, and raises the chance of downward demand/deflation scenario. Also, if the Euro remains at $1.30 or higher, it will be more difficult to export to non-EU countries. To avoid a sharp contraction, look for the ECB to ease monetary policy further in late 2012, even if inflation is close or above its target of 2%.

Fiscal Drag

The impending U.S. fiscal consolidation will have a major impact on growth, and could derail the recovery as fiscal spending is a large component of GDP. Government expenditures are roughly 42% of GDP, and the budget deficit is running close to 10% of GDP. Just reached last month, total public debt is officially larger than the size of the U.S. economy. Much lip service has been paid so far, but dealing with the problem of debt and deficits starts to take shape in 2013. Not only are the Bush tax cuts due to expire at the end of this year, but mandatory spending cuts from last fall’s budget battle are due to kick in, with the sharpest reductions slated on defense spending.

Federal Reserve Chairman Ben Bernanke has warned Congress to avoid severe spending cuts as they could disrupt the recovery. “Congress should try to avoid having too big a hit on the recovery in 2013,” Bernanke said at a House Budget Committee hearing last month. For a Fed chairman to dip into matters of fiscal policy shows how important any government contraction has on the overall economy.

There’s a solid chance that fiscal talks could turn into a total political mess, yet again, though a lot depends on what happens in the election. If the GOP wins the presidency (unlikely at this point), and expands its hold on Congress, it wouldn’t be surprising to see the party reverse its call for reducing spending and embrace tax cuts instead, thus providing more stimulus through a series of supply-side measures. On the other hand, if Obama wins, then there’s a good bet that house Republicans would really go hard on the reduction front as they did during the deficit debate last August. Another political circus like we saw last fall would probably ensue, which would lead to greater volatility in the markets.

Summary

It’s understood that markets typically look 6-12 months ahead. If you believe that, then the market rally since October appears to confirm that the economy is improving and risks such as the ones outlined above are already accounted for. However, I think the market has gotten ahead of itself here, and future gains will be much harder to come by as downside risks emerge during the rest of 2012. A cautious portfolio moving forward is a prudent move. Large-cap dividend payers and non-cyclical stocks get the nod from me, with a flexible cash position that lets you take advantage of a market pullback.

Since the 1970’s, Federal Reserve policy has been dictated by a Congressional mandate to keep prices stable and maintain full employment. While inflation has been largely held in check, the labor market has struggled since the recession, although it appears to be recovering recently. In this article, I’ll focus on the employment situation. An inflation discussion will appear in a later post.

The current unemployment rate stands at 8.3%, and has dropped 0.8 percentage points over the last 12 months. Also, initial jobless claims have been steadily decreasing with Thursday’s figure standing at 351,000 weekly claims filed. Nevertheless, Bernanke was quick to both praise and caution the recent improvement, “The decline in the unemployment rate…has been more rapid than might have been expected…notwithstanding the recent better data, the job market remains far from normal.”

I generally agree with him, but when you look at the statistics underlying the headline rate, you come to realize that employment is very “far from normal.” First, you must understand how the unemployment rate (U-3) is calculated. On the surface, it is the total number of unemployed persons as a percent of the labor force. However, those persons “marginally attached” to the labor force aren’t included. For instance, to be included in the labor force, a worker must have actively looked for a job at some point in the preceding four weeks or they otherwise become “discouraged.”

This classification has major ramifications for calculating the unemployment rate. For instance, while President Obama has been celebrating the 243,000 jobs created in January (for good reason), no mention has been made by his Administration that 1.2 million people gave up looking for work in January, removing them altogether from the labor force. Consequently, this helped the rate fall by .2 percentage points. I personally don’t subscribe to the conspiracy that Obama is coercing the unemployment rate below 8% by the election (no incumbent President has ever won re-election with an unemployment rate above 8%), but the BLS process has to be taken with a grain of salt.

The more accurate measure of joblessness in this country is the U-6 unemployment rate. This is the broadest unemployment measure, including those short-term discouraged and other marginally-attached workers as well as those forced to work part-time because they cannot find full-time employment. As of January, this measure was sitting at 15.1%, or nearly 1 in 6 Americans.

In the coming months, the U-6 measure will be an important signal for the labor market. In my opinion, the official jobless rate is likely to rise during the second half of 2012 as more people return to the job market encouraged by a strengthening economy. That means Americans who now fall into the U-6 category, for stopping their job searches due to discouragement, will eventually fall into the U-3 category as they restart their job hunt.

A U-6 figure that converges toward the official rate (even an official rate that’s above 8.5%) could indicate improving confidence in the labor market and the overall economy. It will be interesting to watch the spin political candidates put on this phenomenon as the election nears, as a higher U-3 rate will no doubt help the GOP in its bid to unseat Obama. When we get the February BLS employment report due out next Friday, I’ll be closely watching the relationship between U-3 and U-6.

Back to the testimony, where Bernanke said he did worry that more than 42.9 percent of America’s unemployed — 5.5 million people — have been out of work for more than six months. He said that if the problem persists, more of the long-term unemployed will lose job skills and struggle to regain them. To me, this is the real labor tragedy of the burst of the housing boom and subsequent financial crisis. Much of the long-term unemployed are workers in construction and manufacturing, industries where jobs are not coming back anytime soon. The unemployment rate for construction workers was at a whopping 17.7 percent in January, more than double the national average. Meanwhile, you have certain industries such as technology and health care with low unemployment rates that are in need of skilled workers but can’t find them. Not only does the long-term unemployed problem create a skills mismatch, but it can lead to the destruction of traditional households and helps lead to a new generation of dependents.

There are also pockets of the country, especially in the Midwest (North Dakota in particular) with the same problem of being unable to find workers. This is where the housing boom and bust plays its role. Up to one-third of all American homeowners find they are underwater on their mortgage, which means the loan value exceeds the market price of the residence. This has caused a “movability” problem, keeping potential workers from moving from high-unemployment states to low-unemployment states.

Moreover, the states with the highest percentage of underwater mortgages generally have the highest unemployment rates. If only the labor market could be solved in terms understandable to players of the classic board game Risk. We’d have a situation where we could move armies of unemployed workers from California, Nevada, and Florida to hiring states like North Dakota, Wyoming, and Texas just like moving a tank from Kamchatka to Japan. Unfortunately, the process of relocating workers will take years, if not decades.

The Fed’s aggressive actions to fight stubbornly high unemployment rates in recent years have been seen by some as fruitful. A number of economists are doubtful of the capability the Fed has in battling unemployment through monetary policy tools. Also, others feel that recent Fed action is wading into fiscal policy, traditionally the responsibility of Congress. This discussion has prompted Representative Kevin Brady, vice chairman of the Joint Economic Committee, to announce the “Sound Dollar Act”, which would strip the Fed of its mandate to maintain full employment. Brady’s main goals are to maintain the purchasing power of the dollar in order to “foster long-term economic growth and stability.” He plans to formally introduce it in early March. The bill claims that the Federal Reserve is laying the grounds for an inflationary spike, as the Fed’s balance sheet has expanded to record levels due to its buying billions of dollars’ worth of Treasury and mortgage bonds to push down borrowing rates. While the bill will likely go the way of other GOP pipe dreams, the renewed public attention on the policies and independence of the central bank has been a major point of contention in recent years.

I agree with a premise of Brady’s bill, in that the Fed can’t directly impact employment. However, the mandate does allow the Fed more flexibility to influence the economy. If the mandate was changed, the Fed would be sitting relatively quiet, as current inflation levels are right around target levels. I don’t think the markets would react very favorably to such a situation, as the proverbial monetary punch bowl is still needed at this point given the weak recovery.

To sum up, employment will continue to be the major concern for the Fed as it determines future monetary policy. Just as Bernanke has been stressing, the recent labor market gains need to be taken with caution, as long-term, structural problems still exist and aren’t going away anytime soon. Eventually, when large gains in employment are coupled with a growing labor force, I may get excited and declare “America is Back”, as Obama has been stressing on the campaign (yes, the campaign has started) trail recently. Unfortunately for him, if the unemployment rate creeps up in the latter half of 2012 as I’m predicting, that phrase may turn out to be a little short-sighted.

While the European financial crisis impacts all 27 countries in the European Union, it is most acutely affecting the 17 countries that use the euro as their currency. Those 17 make up the European Monetary Union (EMU). Although considerable measures and collaboration has been seen among its member countries, especially recently, three core issues continue to dominate the discussion. None of these issues can be solved short-term, and will take substantial and painful coordination in the coming decades in order to ultimately preserve the monetary union.

The first issue is well known. Structurally, the EMU is an economic and monetary union with a common shared currency called the Euro. However, the EMU has been unsuccessful at integrating fiscal policies among its members. Specific budgetary guidelines were laid out at the formation of the EMU in 1999. For example, annual budget deficits were not to exceed 3% of any single member nation’s Gross Domestic Product (GDP). Also, national debt was not to exceed 60% of GDP. This looks fine and dandy on paper, but the pact lacked any mechanism to enforce these agreements. Without fiscal integration, the monetary union was doomed to fail, or at least end up at some turning point like we are watching unfold today.

Secondly, governmental spending spiraled out of control within the EMU. Several member countries (think PIIGS) began to allow large fiscal imbalances to form, with spending outpacing economic growth. This excess spending, of course, needed to be funded by taking on debt. Underlying this lack of discipline was the fact that, as a part of the EMU, member countries were able to borrow at very low interest rates versus what could have been achieved in the market on a stand-alone basis. Likewise, for Greece, membership was a godsend. Bond markets no longer had to worry about inflation or devaluation of the currency like they did when Greece used the Drachma. Instead, lower interest rates brought the cost of borrowing down dramatically. The ratio of net interest costs to GDP fell by 6.5 percentage points in the decade after 1995. Similar effects were seen throughout the rest of the continent, especially in the south.

Lastly, issues of sovereignty and national pride have created a game of political football across Europe. Bringing together 17 countries, all with differing goals and backgrounds, to agree on the future fiscal path of Europe has proven difficult. For example, a crucial vote last fall to expand the European Financial Stability Facility (EFSF) failed to pass after lawmakers in one of the EU’s smallest economies, Slovakia, rejected it. Eventually, the measure passed, but not until after the Slovakian Prime Minister had resigned and the associated uncertainty caused a sell-off in international markets. The pride issue is especially apparent within Germany, the largest economy and most powerful force of the currency bloc. The average citizen in Berlin doesn’t want to be on the hook and pay for mistakes made by other countries, and I don’t blame them. However, nationalistic sentiment does appear to be fading as the debt crisis drags on and on. Earlier this week, the German parliament agreed to a second bailout in Greece Monday in a one-sided vote, 496 to 90. Public uproar over such outcomes still flares up in Germany, but not at the levels seen when the bailout process began.

With these core issues in mind, it’s time to look ahead. Contagion risk has lessened dramatically over the last few months, largely due to the long-term refinancing operation (LTRO) undertaken by the ECB. I’ll touch more on the LTRO program and its pros and cons later, but first I want to stress why contagion has become the most important word related to the sovereign debt crisis. To understand this, you must step back and look at a few statistics. For example, the three countries most affected, Greece, Ireland, and Portugal, collectively account for just six percent of the Eurozone gross domestic product (GDP). Meanwhile, Greece imported just $1.6 billion worth of goods in services from the U.S. in 2010. That’s a drop in the bucket compared to the $1.3 trillion the U.S. exported in total for 2010. Yet, whenever a vote goes the wrong way in Greece or if a PIIGS borrowing rate increases sharply, financial markets take notice, and in a big way, oftentimes trading sharply in one direction or the other.

The reason these countries matter is the risk of contagion. If the Greeks default, it will be the first time for a developed country in 60 some years. That would raise doubts about other governments’ finances and the ability for Europe to work together to solve its problems. The fear is that if the Greeks default, it would prompt the possibility and likelihood of a Portuguese default, and perhaps even Spanish default and trigger concerns about Italy.  The international financial community doesn’t want this to happen and often cites the messy 1997 Asian Financial Crisis as fodder for this debate.

Mainly, it’s about uncertainty. No one really knew what was happening when Lehman Brothers fell back in 2008. Similarly, nobody has the recipe for what happens if a country were to leave the Euro zone, which some economists believe is the only long-term solution for Greece. These events not only cause the direct consequences we can measure, but can expose indirect relationships that are tough to quantify but are of great importance (and cost). Now, do I think a Lehman-type event is coming? No I don’t, but then, I really don’t want to find out if I’m correct or not, either.

Another concern is the triggering of credit-default swaps (CDS), the financial instruments that protect against losses on debt, if such a default occurs. Essentially, the seller of the CDS agrees to compensate the buyer in the event of a default. For this protection privilege, the buyer of the CDS makes a series of payments (CDS “fee”) to the seller. Greece is currently preparing to overhaul its bonds next month, a restructuring that has caught the attention of the International Swaps and Derivatives Association (ISDA). ISDA will meet Thursday to determine whether a certain part of the recent bailout terms will force parties to make on the credit-default swaps.

If parties are forced to make good on the CDS instruments, the situation could send tremors through the market. Financial reforms that aim to strengthen the derivatives market is not yet in place, which raises questions about how the market will react if the CDS is paid out. During the recent financial crisis, banks feared that their counterparties might not be able to meet such obligations. The situation set off a chain reaction that froze global markets until governments and central banks provided enormous financial support. Now, central clearing services are in place that are supposed to lower this counterparty risk, but the effort to get these services up and functional has been slowed, mainly because of politics Therefore, banks remain largely responsible for ensuring payment, which has kept CDS concerns elevated.

Finally, I’ll touch on the LTRO, which has been highly regarded in the financial community as the key program lowering contagion risk by increasing liquidity, especially in the remaining PIIGS countries (those that haven’t been bailed out already). The essentials involve the ECB lending money at a very low interest rate to euro zone banks. The injection of cheap money allows the banks to use it to buy higher-yielding investments, or to lend more money to businesses and consumers, both of which could help the economy return to growth as well as potentially yielding better returns for the weak European banking sector. The LTRO operation have been in place for years, but the ECB lengthened the maturity option this past December to 3 years, which has proven to be very accommodative to the financial system. In previous auctions, the money usually had to be paid back within three months, six months or 1 year.

Today saw the second round of the ECB mass release of loans at record low interest rates into the European banking system (free money). 800 banks participated in the three-year maturity funding program that saw a take-up of 529.5 billion euros. The increased liquidity has had a strong easing effect on Italian and Spanish bond yields, as well as the overall market. Going forward, it is obvious that repeated monetary easing measures (like LTRO) produce diminishing returns, so I don’t think we can expect LTRO 3, 4, and 5 to result in the same easing of pressures in Italian and Spanish bond yields that we’ve seen from the first two LTRO’s. Even much of the effects of the 2nd LTRO looked to be priced in before it hit the market today. However, you can’t doubt the success, considering the near-panic surrounding Italian and Spanish debt just three short months ago.

I may seem pretty optimistic on the LTRO program, but it still represents a short-term fix. I concede (and praise) that the measure seems to have taken a financial crisis off of the table. But that’s to be expected anyways, as it represents the ECB acting as the lender of last resort, which is the main function of a central bank.

However, nothing has changed from a long-term, structural outlook. The LTRO cannot correct the massive trade imbalances that are at the heart of the PIIGS problems. The LTRO cannot balance fiscal budgets. The LTRO cannot balance the social and political problems that lie at the heart of the EMU. The LTRO will not convince German citizens to support bailouts for its southern European counterparties. Finally, and most importantly, the LTRO will not improve the solvency of European banks. It provides needed funding, but doesn’t improve the substance of the banking sector’s assets, which still face large write-downs on credits of all sorts, especially if the euro zone dips into a recession later this year.

There are too many moving parts (especially politicians’ mouths) to be able to predict what will happen to the European debt crisis over the next few months. Rest assured, there will be some fireworks, both good and bad. Aside from the possible fallout from a CDS event out of Greece, I actually think the impact of high oil prices will trump sovereign debt concerns this year, particularly as we move into the summer driving season. If any sort of spike sends Brent crude up 10-15% higher from its current level ($122), many more economists will be joining my personal prediction that numerous EU countries will be in recession by year-end. With the current fragility across the European economic system, an exogenous shock like oil (or a hand landing in China) can tip the scales pretty easily at this point.

Berkshire recently released its 2011 annual report, which included the much anticipated “Chairman’s Letter”, where Buffet highlights Berkshire’s current investment strategy and reflects on the broader business landscape. He also sat down for an extended interview on CNBC, which generated greater insights into what the so-called “Oracle of Omaha” is thinking these days. At a time when approval ratings are low for corporate America, Buffet is bucking the trend as his admirers grow and he rids himself of the David Sokol – Lubrizol controversy of last year.  His appeal to the masses is easy to understand, as he truly puts his money where his mouth is and is extremely generous.  This is evidenced by the fact that 98 percent of his net worth – ~$40 billion – is tied to Berkshire stock, and the fact that Buffet has pledged to give away 99 percent of his fortune to philanthropic causes, primarily via the Gates Foundation.

My take-away from both Berkshire’s annual letter and his CNBC interview is that Buffet is relatively optimistic on the future of his businesses and the economy as a whole. Below, I’ll lay out a few of his main points as they relate to tax reform. In later articles, I’ll incorporate Buffet’s analysis as it relates to the future profitability of banking, a possible recovery in housing, and the strength of the tepid economic recovery in the United States.

“Taxes are the price we pay for civilization.” Those were the famous words of Oliver Wendell Holmes, the former Supreme Court Justice. Besides seemingly Ron Paul and his supporters, Americans agree that taxes are a necessary evil in exchange for a functioning government. But who should pay taxes? What tax rate is appropriate – for businesses and individuals? How about investment income? These questions aren’t easy to answer, and are a contributing factor to the deep partisanship that exists in Washington and has recently served as debate fodder for both the Tea Party and Occupy Wall Street movement.

The implications of tax structure changes will impact the economy greatly in the next decade and will always remain a hot-button political issue. As the 2012 election approaches, I expect the rhetoric to continue to heat up as we’ve already seen a number of major tax reform packages being offered by both parties. Also, the framework for taxes within the Bowles-Simpson fiscal reform package will play a role (hopefully, a major one) in the debate going forward.

Significant differences do exist within the various plans, including how to tax the wealthy or how to tax corporate earnings held overseas, but the two main objectives are simplification and fairness. On the former, depending on how you count, the Internal Revenue Code is somewhere around 3,000 pages long and has 7 times as many words as the Bible. On the latter, Americans are frustrated when they see large, profitable companies such as GE paying little in taxes while they are struggling to live paycheck to paycheck and feel they themselves are deserving of a tax break. Many corporations pay a tax rate far below the top marginal rate and the statistics are mind-boggling: GE paid a negative tax rate of minus 13.5 percent of their profits in federal income taxes between 2008 and 2010, according to the Citizens for Tax Justice. Information technology companies paid taxes at a 2.5 percent rate, utilities companies at a 3.7 percent rate, and financial corporations at a 15.5 percent rate.

Back to Mr. Buffet, who has come out in strong favor of the Obama Administration’s tax policy positions. This includes repealing the Bush tax cuts on the wealthiest Americans (including Buffet of course). Buffet’s go-to argument when expressing his agreement on increasing the top individual rate from its current 35 percent to 39.6 percent is pointing out that he pays a lower effective tax rate than his secretary, after adding in the payroll tax. This is, of course, due to the nature of our tax system. Earned income is usually taxed at a much higher rate than capital gains, from which Buffet generates virtually all of his income. Thus, Buffet’s effective tax rate is 17.4%, while his secretary’s rate is 34%.

No doubt, repealing the Bush tax cuts will be central to Obama’s election strategy this year, and I personally think it’s an issue he can exploit the GOP on. Mitt Romney (assumed nominee at this point) will face trouble explaining to the average voter that all taxpayers in the highest bracket are “job creators” and are already paying their fair share. This is a legitimate argument, considering the top 1% of earners are responsible for 40% of the federal tax burden. However, Obama, with support from Buffet, George Soros and others seem to be winning this argument. It especially won’t help Romney’s case when more voters become aware of his effective tax rate of 15.4%. (although he did donate ~$7 million to charity)

On the corporate side, Buffet also believes corporations should be paying more to the government. That’s saying a lot, considering Berkshire paid $2 billion in taxes last year, or more than one percent of all corporate taxes in the U.S. The Obama Administration’s new corporate tax reform plan would accomplish an increase in revenue. Although it would take the top corporate rate from 35 percent to 28 percent, a large reduction in tax loopholes and subsidies would result in a net positive to revenue generation. Buffet’s comments from the CNBC interview revealed his thinking on corporate taxation and he once again used effective tax rates to make his point.

“The interesting thing about the corporate rate is that corporate profits, as a percentage of GDP last year were the highest or just about the highest in the last 50 years. They were 10 and a fraction percent of GDP. That’s higher than we’ve seen in 50 years.”

He continued: “The corporate taxes as a percentage of GDP were 1.2 percent, $180 billion. That’s just about the lowest we’ve seen. So our corporate tax rate last year, effectively, in terms of taxes paid for the United States, was around 12 percent, which is well below those existing in most of the industrialized countries around the world.”

It’s hard to argue with statistics like that, and I agree that corporations should pay their fair share. For me though, it’s more about consistency in the approach to dealing with tax reform. Companies should be confident in being able to estimate their tax liability for the coming year for budgeting purposes, corporate strategy, etc. The uncertainty surrounding taxes and the other big elephant in the room, health care reform, have been a net drag on business and hiring in the past few years. A consistent, pro-business message coming out of Washington can do a lot for business investment and confidence. I would like to see a broad overhaul where the rates are lowered, the tax base is broadened, and the special deductions/exemptions are reduced. I realize this won’t happen during an election year, but during the next presidential term, whether Democrat or Republican, tax reform is a must for the future vibrancy of our economy.

The questions above aren’t easy to answer as there are many factors, economic and political, which influence the price of oil. Many people (especially politicians) are quick to accuse specific parties for price fluctuations, whether it be speculators, OPEC, the Federal Reserve, the President, etc. However, assigning blame in such a manner is short-sighted, as all factors contribute in one way or another. As President Obama and others continue to emphasize, there is no “silver bullet” for battling high oil prices.  Given how important oil is to the world economy, it’s important to be able to recognize the various metrics at play.

An escalation in oil prices is usually looked at as a net positive, as increases usually correspond with strong economic growth, which spurs demand for oil. Economic growth was the main rationale used during the 2000s oil boom which saw global demand for oil increase roughly 15 percent and prices rise from $20-$30 per barrel to around $70-$90 on average by the end of the decade. Fluctuations in price were common, as in any market, but the overall pattern was strongly to the upside.

Without question, demand is part of the overall story driving oil prices currently, especially with high-single digit growth rates being seen in emerging markets, driven by Chinese demand growth. Emerging market economies tend to have a greater proportion of their economies in manufacturing industries, which are more energy intensive than service industries, which dominates the majority of U.S. and European economies. Automobile ownership per capita is also strongly correlated with rising incomes and has much room to grow in emerging countries as consumers move into the middle class. China’s strong economic growth has made it the largest energy consumer and second largest oil consumer in the world.

However, oil demand in Europe is falling and consumption in the United States – the world’s top consumer – has hit the lowest level in nearly 15 years, a report from the Energy Information Administration (EIA) showed this past week. At a lower level, looking at the American consumer, gasoline demand is down 6% YOY, which makes the recent rise in gasoline prices even more frustrating to bear. EIA’s current projections show that virtually all the net increase in oil consumption in the next 25 years will come from emerging markets. The long-term demand story for oil from emerging markets is intact, but not a convincing argument when explaining the 30-cent increase in gasoline in the last month.

The main focus in oil markets today is centered on supply concerns, and rightfully so, as tensions in the Middle East, specifically Iran, have become increasingly stressed. The United States and its allies believe Iran is building nuclear weapons, which Tehran has denied for years. Iran is OPEC’s second-largest producer after Saudi Arabia, and exports 2.5 million barrels of oil per day, or roughly 3 percent of global oil supplies. 500,000 barrels or so go to Europe and the rest is sent to China, India, Japan and South Korea, amongst others. Any removal or reduction of Iranian crude from the market would be very harmful; as it’s unlikely OPEC has the resolve to dip into spare capacity to increase production levels to fully offset a loss of Iranian crude.

Recently, the European Union (EU) enacted a ban on Iran oil imports effective July 1, and placed sanctions on Iran’s central bank, essentially freezing its assets.  Also, in December, the United States warned companies in its market that it would “blacklist” them if they did business with Iran’s central bank.

In a move of retaliation, Iran announced that it halted oil exports to the United Kingdom and France, while warning European companies that it would halt their supplies unless they sign longer-termed contracts. The actual impact of this move is small, considering that France and the UK don’t import a significant portion of crude oil from Iran. It’s assumed they will look to Saudi Arabia or Russia to make up for the lost imports. However, the move signifies the tenacity Iran continues to show in defying sanctions, and highlights the current instability of the diplomacy process.

In an attempt to calm fears, Iran oil ministry spokesman Alireza Nikzad’s issued a statement stressing that Iran “will sell our oil to new customers.” However, according to Financial Times, Tehran is “struggling” to find a new buyer for the estimated 500,000 barrels of oil per day left as surplus from its decision to halt sales to France and the UK.

Also clouding fears is the latest report from a U.N. nuclear watchdog that showed a large expansion of uranium enrichment in Iran. This news, coupled with the heightening rhetoric emanating from Israel has increased the likelihood of an Iranian-Israeli conflict within the next few months.

U.S. Defense Secretary Panetta believes there is a strong likelihood that Israel will strike Iran in April, May or June, which is before Iran enters what Israelis have described as a “zone of immunity” to commence building a nuclear bomb. The main fear out of Israel is that the Iranians will have stored enough enriched uranium in underground facilities to make a weapon by then, which will result in only the United States being able to stop them militarily.

The U.N. report comes as European buyers of Iranian oil cut back on purchases ahead of the EU embargo effective July 1. Some of Iran’s biggest customers in Asia including China have also reduced purchases. Japan, the world’s third-largest oil importer, may cut Iranian crude imports by a more-than-expected 20 percent as it seeks a waiver from U.S. sanctions. In 2011, the country bought almost 9 percent of its crude from Iran.

Finally, there’s the concern that Iran will retaliate against sanctions imposed by Western nations and attempt to close the Strait of Hormuz — a vital waterway that carries about 20 percent of the world’s oil supply. If action is taken, successfully or unsuccessfully, oil would skyrocket, potentially challenging the $147 mark not seen since the summer spike of 2008, or even higher. It’s a waterway that’s “absolutely critical to the world economy…the most important chokepoint in the world,” according Dr. Daniel Yergin, energy expert and Pulitzer Prize winning author of The Prize and The Quest.

U.S. Treasury Secretary Timothy Geithner told CNBC on Friday that “Iran can do a lot of damage to the global economy.” Geithner also touched on U.S. options for containing rising gasoline prices, but admits the ability to affect short-term prices is limited. The biggest impact would come from releasing reserves from the Strategic Oil Preserve (SOP). At the G20 meeting this past weekend in Mexico City, there was no formal discussion for doing so. However, one would expect the SOP to be drawn down during 2012 in a price spike occurs, given the influences of an election year.

To complicate things, a few other political hotspots are fueling the supply side-story. South Sudan has suspended its 350,000 barrels per day of oil production in a row with over pipeline payments with Sudan to the North. The two sides have failed to reach an agreement. The dispute came to a head in January when South Sudan shut down oil production after Sudan began taking oil from a connecting pipeline to compensate for what it called unpaid transit fees. South Sudan has said the fees are too high.

Staying in Africa, concerns around Nigerian crude oil have ebbed and flowed throughout the past year. The country has seen massive labor strikes and continued terrorist attacks against the country’s oil infrastructure. The politically unstable country produces almost 2 million barrels of oil per day and will have an even greater influence moving forward. Licenses for major energy companies like Shell and Chevron for work in Nigeria are expected to be renewed for 20 years, and analysts expect the country to eventually produce 4 million barrels per day.

Also, continuing conflicts in Syria and Yemen are also being monitored by energy analysts, but these stories have been mostly pushed aside as Iran concerns have come to center stage. Overall, the estimated geopolitical premium in the crude oil market is estimated to be $10-$25 per barrel, depending on which energy analyst is polled.

As the Iranian crisis continues to unfold, the oil market will be watched, analyzed, and scrutinized from every corner. The emphasis should be on pace. If gradual increases in price occur, the U.S. economy can hold up. Growth will slow marginally, but an outright recession can be avoided, as long as oil prices stay range-bound around current levels. No doubt consumers will complain about paying more at the pump, as they have started to already, but stronger employment and economic reports seen recently will buoy optimism for a while. If we start to see gasoline prices either approaching the 2008 highs or continue moving higher at the current pace, then there is major cause for concern. Fortunately, that doesn’t look to be the consensus projection at the moment.

My personal prediction is that oil prices will continue moving higher in the short-term, but will level off or even fall in the second half of 2012. Unfortunately, my conviction on this view has lessened, given the price spike of the last month. Five main factors are driving my take, among others: 1) The Federal Reserve will not enact another round of quantitative easing, which will lower investors’ appetite for risk and give strength to the U.S. Dollar 2) Oil revenue’s importance to the social and political fabric of Iran (makes up 20% of Iranian GDP) will lead to an eventual compromise on economic sanctions and the future of Iran’s nuclear program 3) The oil market will once again trade on fundamentals as the geopolitical premium in crude falls, and realize current demand doesn’t justify such high levels in crude 4) Europe’s debt crisis is not over and many EU countries will be in official recessions by year-end 5) Emerging market growth (China), although still impressive, falls below analyst expectations in the second half.

Whatever happens to the price of oil during the next few months, it will have major repercussions on the economic and political scene around the world. It’s not time to panic yet, but there are legitimate reasons oil is becoming front page news again.

Some people wary of the prohibitive costs of health insurance may prefer not to get insurance at all. But this should not be the case. Here are some pros and cons of getting cheap medical insurance:

Pros
Prompt attention. Illnesses need prompt attention or they will become full-blown. To avoid this, getting an affordable health insurance is the next best option.

Annual medical check-ups. This can help detect illnesses at its earliest stage. Blood test, cholesterol and sugar levels are checked during the check-up. Most health insurance provide annual check-ups for free.

Discounted rate. The charges are usually lower for those with insurance policy than those who don’t. Insurance firms are able to negotiate for lower rates with healthcare providers.

Peace of mind. Illnesses and accidents strike without warning. If you did not get an insurance to cover such emergency expenses, you might end up shelling more money than expected. Also, aside from the burden of the illness or injury, you also need to cope with the additional burden of securing money to pay for the medical bills. With health insurance, you need not worry about finding money to pay for the medical expenses.

Cons
High premiums. The policy holder may need to pay higher monthly premiums due to rising medical costs.

Risk of rejection. A person with preexisting medical condition may get rejected by insurance providers. If not, they may be required to pay higher-than-normal premiums. People should also consider things to not say to your insurance company.

There are a number of factors that can affect the health insurance costs. Individual or family policy may differ considerably in price. Family policy often comes out cheaper. But this may not be applicable to your case if one member of the family has a pre-existing medical condition. If such is the case, a separate individual policy for the ailing family member and a family policy for rest of the family might be the best option. Age is also a factor. This is why insurance is a ‘timing strategy’. Older people pay more in their medical insurance plans than younger people because they are more prone to illnesses.

In order to get cheaper health insurance, it will be a good idea to get a high deductible policy. This means you will pay a huge portion of the medical expense out-of-pocket if illness or accident occurs. Some can save a significant amount of money by opting to deduct more. This may mean that there will be more conditions that are included in the policy exclusions. To maintain an affordable medical insurance policy, it will be a great idea to set aside some money that can be used in case of illness.

Paying premiums yearly rather than monthly can also reduce the individual health insurance plans costs. Also, the policy holder will be charged transaction fees each time he pays. For monthly premiums, this means 12 charges of transaction fees.

One way is to spread the cost over the year in the run-up to Christmas – although this takes some discipline and organization. Possible benefits of Christmas shopping this way are that you can afford to buy really good presents at times of the year when you’re feeling flush and/or you find them cheap – and it can also help you to avoid getting into debt in December.

However, many people will get into debt this Christmas to pay for all those little extras that make Christmas so special. A YouGov survey on behalf of Intelligent Environments indicates that 31% of people will get into some sort of debt this Christmas – 58% of them will spend extra on their credit cards and 39% will go into their overdraft.

Credit card debt and overdrafts are fairly flexible debts because you can ‘get away’ with making small payments towards them.

However, many people don’t realize just how expensive these forms of debt can be. If you only make the minimum payments, you can pay much more interest overall than if you ‘overpaid’ that debt. It’ll also take far longer to repay debt that way – possibly many years.

One trouble with Christmas debt is that come January, you find you have all your usual bills to pay, with debt repayments on top of all your other expenses. Many personal budgets are already squeezed and additional debt repayments can, in some cases, tip the balance and leave someone with a real debt problem.

If you do find yourself with a debt problem at the start of the year, debt management might be able to help you. Debt management has quite a few advantages – for example, you could lower your monthly payments if you spread them over a longer period of time and some lenders will waive or even freeze interest and charges on money you owe them.

However, it’s not as simple as running up a huge credit card bill and turning to debt management to deal with it! Debt management is only for people who genuinely can’t afford their unsecured debts anymore. Lowering monthly payments also damages your credit record and there’s no guarantee that your lenders would agree to it, or freeze interest, anyway – and if they don’t freeze interest, repaying the money more slowly will cost more in interest.

Having said that, if you think you may have a debt problem, it’s worth speaking to an expert before things get out of hand. They could tell you about the best way out of debt for your current circumstances, so it’s well worth seeking advice.

How Do I Save Money On Taxes?

Saving money on taxes is always a concern for hard working Americans and is especially true in today’s tough economy.  What most people don’t know is that too often they are over paying taxes.

The tax advising team at The Lucrative Investor has partnered with an offensive tax firm that began in 1975 that saves clients an average of $5,800.  One of the most recent tax reviews saved a real estate agent $25,000!  This was a cold hard cash given back to the agent.

The proper tax structure is crucial in order to ensure legally following the tax guidelines designated by the IRS, while taking all of the deductions and advantages that the IRS allows.  Most CPAs do not fully understand the tax code as it is complicated and continues to adapt.

Self employed Americans are at the top of the spectrum for over paying taxes.  As mentioned, this is often a result of not having the proper tax structure and having the fear of the IRS lead them to way to the safe side, opposed to the offensive side.

The Lucrative Investor understands the concerns of investors and knows that proper accounting, business structure and cash flow are crucial to success and growth of a financial portfolio.

In order to help investors achieve their goals, The Lucrative Investor is able to offer a FREE three year tax review to see if you are paying too much in taxes!  That’s right, a FREE three year review to see how much money we can save you today.

Here are the top three steps for a successful business and the role The Lucrative Investor plays:

1.  Build a Team
-  Outsource all but your critical and core competencies
-  The Lucrative Investor becomes part of your team offering our core competency in tax structure design and implementation

2.  Demand Solutions
-  Require veri?able value-added performance from your team members
-  The Lucrative Investor is solution-driven providing services with measurable ?nanical value

3.  Operate Offensively
-  Don’t react to market forces – create market opportunities
-  The Lucrative Investor empowers your business to offensively approach the tax code generating cash?ow and maximizing tax protection

Bank of America recently announced that it was planning to get rid of its basic free checking account options for their customers. Not every larger banking entity has done so but many are expected to follow suit. This has been all brought about by a struggle between banking companies and merchants nationwide. It’s also largely due to the federal government mandating that banks can only charge fees for those who’ve signed up for overdraft protection. Banks, until now, have been able to pay for running checking accounts through charging overdraft fees. Now that the fees are going away, so is the free checking.

This all comes at a very difficult time when many people are being faced with cost hikes across the board. Everyone is struggling with their finances and taking out title loans as a way to pay of their bills. Money is tight right now and, for some individuals, this is just one step too far.

In a report that appeared on NPR, one woman talked about how she did away with all of her accounts and now uses a prepaid account card to pay her bills. It wasn’t that she couldn’t afford the extra few dollars a month, but, as she saw it, it was just one step too far. It seems that many people are feeling this strain as they’re being hit at every turn. This latest move by the country’s largest banks might actually have some pretty serious side effects.

The vast majority of banks are smaller institutions that operate locally and without the nationwide coverage. Many small banks are thinking about advertising their services and offering free checking accounts to its patrons. This is seen as one way that could get more customers but the only way that it would work is if people signed up en-mass. Free checking isn’t really free. It costs the merchant and the bank. When it comes to single purchases, we’re talking about small amounts of money. But added up, that a lot. Smaller banking institutions are hoping to offer free checking and increase their profile.

So, the end of free checking isn’t really here. You can still get a free checking account with many smaller institutions. If this is something that’s interesting to you, check with your local banks and see if they’ll offer you something similar. Many feel, though, that this will eventually kill off free checking. People want their checking accounts and check cards to be usable anywhere they go. That’s why these larger banks are charging now. They’re big and people want their service and, for the most part, they’re willing to pay for it. Are you?

If you are a new investor to the HY market you can take advantage of the biggest monthly loss since November 2008.  In addition, yields to maturity (YTM = cash interest payments + any gain/loss from holding the bond to maturity) relative to treasuries have risen to levels not seen since the summer of 2009.  For example, the YTM’s on a variety of representative high yield indices are above 8% versus around 2% for ‘risk free’ 10-year U.S. Treasury bonds and approximately 4.25% for investment grade bonds.  The last time potential returns relative to treasury bonds were this good was in the summer of 2009, and investors who were brave enough to commit capital at that time were rewarded with 15% – 20% annual returns.

The current high yield opportunity will most likely not lead to double digit returns.  However, as in 2009, the rush to reduce risk by institutional investors combined with declining liquidity has created an attractive return potential relative to the actual fundamental risk in the HY market.
U.S. corporate fundamentals have improved dramatically since 2008.  For example, corporations have lowered debt and dramatically improved liquidity.  Many U.S. companies have enormous cash balances that have been held in reserve due to economic uncertainties.  In addition, unlike the economy overall, corporate net income has grown steadily since the recession low and is making new all-time highs.

If you have been leery of the U.S. stock market and are underwhelmed by the returns on CDs or other low-risk fixed income securities, you might consider the opportunity in U.S. high yield bonds.  There are many HY mutual funds available to individual investors that provide broad exposure to the sector.  Based on fundamentals, I think the HY market is cheap relative to the actual risk of default and high-single digit returns available in the sector today appear attractive relative to other fixed income alternatives.

A Rush Out of ‘Junk’

The answer is nobody really knows.  However, there are two main reasons why I’m not selling my shares.  First, this isn’t a surprise.  Over the past seven years, since Mr. Jobs was first diagnosed with a rare form of pancreatic cancer and underwent a liver transplant, he has taken three leaves of absence for medical reasons, most recently beginning last January.  During these periods Chief Operating Officer, Tim Cook, has managed day-to-day operations.   Based on the decline of his physical appearance I wouldn’t be surprised to find out that Mr. Job’s role in Apple’s daily operations limited throughout that period.

Second, the past seven years have been an incredibly successful period for Apple’s business and stock price.  Apple’s stock has been a ten bagger since 2004 and net income is up an even greater percentage.   Mr. Cook was managing Apple during much of this period – he had to have played an important role in that success!

It is clear Steve Jobs has been a huge inspiration and a driving force behind Apple’s phenomenal success, and that can’t be replaced.  However, I’d bet his core philosophies and vision is so ingrained in the Apple culture that in his absence the company will maintain and continue it’s phenomenal record of success.

It is not only the size and volatility of recent market swings that points to hedge fund managers as the volatility culprits.  In Saturday’s Weekend WSJ there was a very interesting article titled: Too Flustered to Trade: A Portrait of the Angry Investor written by Jason Zweig.  Mr. Zweig details online polling data collected by a team of psychologists from Decision Research between August 9 and 15.  The polling data suggest that small investors are angry, worried, and during the recent market turmoil they have made few if any changes to their portfolios.  It hasn’t been small investors who’ve sent share prices south and the polling data also suggest they won’t be starting any new wave of selling.   Another group of investors who have been inactive recently are long only institutional managers.   Speaking from experience, traditional equity portfolio managers rarely see much value in making portfolio changes during periods of such drastic volatility.  It’s the hedgies who have been piling in and out of stocks –mostly into S&P 500 shorts.  It’s the hedgies who have driven stocks down to valuation levels similar to March 2009.  They may be right about slowing economic growth next year or European banking problems, but they are wrong to bail out of seaworthy stocks like Apple (COMP: AAPL) and Amazon (COMP: AMZN).  These two blue chip growth ships may have to endure some stormy business conditions but they have little risk of sinking.  When economic weather improves, they will be making new all-time highs and rewarding investors who have greater conviction than a scurrying rat.

The first paragraph read “The Justice Department is investigating whether the nation’s largest credit ratings agency, Standard & Poor’s, improperly rated dozens of mortgage securities in the years leading up to the financial crisis, according to two people interviewed by the government and another briefed on such interviews.”

I couldn’t believe my eyes! I didn’t think it was a debatable topic anymore that the credit agencies completely dropped the ball on rating Mortgage Back Securities among other financial instruments used by Wall Street. Millions of investors lost their shorts due to these agencies recording record earnings for their rating services preformed.

I thought it was common sense to most investors that top ratings for MBS’s helped fuel one of the largest housing bubbles in our Nation’s history.

It reminded me of a clip recently done by Jon Stewart on The Daily Show.

I want to be clear that I do not fault Standard & Poors in their decision to downgrade the United States to a AA+. The United States in most economist opinions does deserve a down grade. It is difficult to justify a top credit rating when revenues are $2.3 trillion annually, but we spend $3.7 trillion dollars. Continuous use of excessive borrowing will eventually lead to a demise unless something is changed.

Unfortunately people, especially Americans are creatures of habit that will likely have to go through more pain before we decide to change our ways and live within our means.

Answer: Not much!

The market has already discounted the likelihood of today’s crummy economic conditions.  It’s possible that the Philly Economic Index, which was really bad, may lead stocks to new short term lows, but I’d bet against it.

Over the last week the market rallied 8%, which was an enormous move, thus stocks were very over-bought – the flip side of how over-sold they were on August 9^th.   Today’s action is working off the over-bought momentum that took the market up 8% in five days.  It is part of a normal bottoming process and not a new signal of economic collapse.

I was talking to my retirement age father the other day and he said something like, “This market is crazy, how can it be so volatile.”   A great question; I’m sure a lot of people are thinking.  Even professional money managers are confused.  According to a front page story in today’s WSJ, “Institutional clients are shell shocked.” Furthermore, according to chief market strategist, Rick Bensignor of Dahlman Rose & Co was quoted in the same article saying, “some institutional investors I know said they don’t want to play this game anymore.”

I told my Dad that I thought the market and public really got spooked by the debt ceiling talks, and that the stocks were discounting the possibility of even poorer economic growth, employment growth and consumer sentiment.  I also told him at times like these, I used to like to listen to guy named Dick McCabe, chief market strategist from Merrill Lynch.   Dick retired in 2005 but I’m pretty sure he would have said something like – to be continued…end Part 1

Part 2.
At times like this, I used to listen to a guy named Dick McCabe the chief market strategist from Merrill Lynch who retired in 2005.  I never met Dick in person but spoke to him on the phone many times.  He is the mildest mannered guy you’ll ever meet and is the ultimate student of the market.  Dick was always able to give objective context to market periods like this week compared to other volatile periods.

If Dick were still sitting at his desk today, I’m sure he would have come on Merrill’s squawk box (intercom system used by traders/brokers) after the close sometime this past week to say something like the following;  the market has been just experienced a 15% pullback, which is fairly dramatic but not that unusual.  For example, the market pulled back about the same percentage last spring and summer (April 23 – July 2) without an S&P 500 downgrade and in somewhat less dramatic fashion and then the market recovered nicely during the fall and early winter.  He would probably also say that intense volatility (400 point Dow moves) is fairly common at important market lows.  Extreme fluctuations are simply part of the process of washing out weak equity holders and at the same time shaking hedge funds and other institutional investors out of their market shorts (bets the market will go down).

He might also have said something about the CBOE Put/Call ratio, one of Dick’s favorite indicators.  The P/C ratio is the ratio of put volume (bearish bets) vs. call volume (bullish bets) traded on the Chicago Board of Options Exchange.  The P/C ratio is a great way to measure how many investors are bearish vs. bullish.  When the 10 day averaged reached 1.4, Dick would say that now was a great time to buy.   FYI, the 10 day average was 1.24 after Thursday’s close – not perfect but close to a very good buy signal.

Finally, he might wrap up by saying that he didn’t know if the economy was going to slide into recession or some other piece of bad news was going to pop up.  But, if you invested in stocks when the P/C ratio was as high (like it is right now)a year or two from now you would look back and be happy you had followed its signal.

The Chicago Tribune editorial writers are exactly right about the above quote.  However, they go on to explain how the economy is really quite a lot better than it looks and it is “misguided buyers/sellers” of stocks who are wrong.  I have an old partner who used to say, “That kind of advice and a quarter will buy you a cup of coffee.”   Meaning:  it isn’t worth squat.

What the Chicago Tribune doesn’t understand is – stocks discount the future.   And what the stock market has been saying over the past month is that while our political leaders were dithering over their Band-Aid plan, any small business plans for future hiring, investment or spending along with consumer optimism were swirling down the commode.

That’s the bad news the market is discounting.  The good news is our economy isn’t the only thing that affects the stocks in your portfolio like Apple and Johnson & Johnson.  In fact, from a fundamental standpoint our economy is only a part of what’s important.  Factors like: interest rates, global growth, cost controls and new products are more important and, so far at least, the events in our nation’s capitol haven’t screwed those things up.

Most important corporate net income growth has been great; the S&P 500 is on track for record earnings (albeit aided by mass layoffs).  From a P/E standpoint stocks are cheap, technically they are extremely oversold and I’d wager the market is within a few percentage points of its short term lows.

Lately fear has won out but, there is another old stock market truism I like and it goes “The best investments decision never feel good.”  I can attest that taking advantage of the recent decline to do some buying is a decision that would not feel good but like the saying goes it will very likely make you money in the long run.

Over the past month while Congress and the President wrangled over who could pass a more “politically” painful to the other’s base, U.S, Treasury Bonds rose in price.  Measured by Pimco’s 7yr – 15yr U.S. Treasury Bond Index, U.S. long term debt rose 5% and made a new high for the year.

What? You say,  how could that be?  Well it appears most investors believed Pimco’s imminent fixed income manager Bill Gross, who said, “the  greater risk to Treasury returns is inflation”, which is commonly produced by strong GDP growth.  U.S. and global stock market action,  poor economic data recently, and falling consumer sentiment are signaling zero risk of that happening.

So fear not if you have a good portion of your investments dedicated to U.S. Treasury Bonds.  However, the budget busting problems such as healthcare spending, Social Security and a congress full of ten cent millionaires aren’t going away.   However, while U.S. debt is safer than other investments today, when the day of U.S. fiscal reckoning finally arrives, U.S. Treasuries might not be the only place for all your marbles.

Lets face it, for some people, being a landlord is very undesirable, but having the security and benefits of owning real estate is very desirable.  Triple net leases are able to offer the security of owning a tangible investment like real estate, without having to place tenants every year and worry about the headaches and time it takes to maintain a property.  Instead of dealing with individual people, tenants are corporate companies with credit ratings that allow owners to asses their level of risk and return.  The higher a company’s corporate credit rating, the lower the capitulation rate (cap rate) or annual return on your investment.  Typical cap rates for triple net lease range from 6% to 10%, although some triple net leases offer lower and higher cap rates.

Triple net leases are also unique in their duration.  Unlike a typical residential lease that lasts only 6 to 12 months, a triple net lease lasts typically 15 to 30 years.  This is a huge advantage for property owners who want consistency in the monthly payments and the security of not having to worry about the constant struggle of placing tenants.  Triple net leases also take into consideration inflation and typically include rent increase clauses through the life of the lease term.

Typical tenants for triple net leases are Walgreens, CVS, Social Security Administration, Arbys, Pizza Hut, 7eleven, Wells Fargo and many more.  These well recognized companies are willing to participate in triple net leases, because owning all of their business locations is not advantageous to their business model or growth.

The purchase prices of triple net leases have a wide range that can be as low as $500,000 and exceed $20,000,000.  Most purchasers of triple net leases put 50% down, or pay cash through a 1031 exchange or savings.  A triple net lease purchaser may be looking to have a healthy cash flow for retirement, or perhaps steady income after inheriting a large sum of money.

Lets take a look at a typical triple net lease for a buyer who has decided to 1031 exchange their money into a Walgreens (on a side note, Walgreens will typically only occupy corner locations unless confined to a large city) that is AAA rated with a cap rate of 7.25% at a purchase price of $5,500,000.

Purchase Price: $5,500,000
Cap Rate: 7.25%

To Calculate the annual and monthly payments, simply take the purchase price of $5,500,000 multiplied by 7.25% for the annual rental amount, which is $398,750 or $33,229.17 every month.  This is an ideal situation for an investor who is looking for a consistent return, plus likes owning real estate.  Some investors may be willing to purchase a triple net lease with a lower credit rating for a stronger cap rate in the 9%-10% range.

Owning a triple net property offers a long term lease with a corporately rated tenant, opposed to an individual tenant in residential real estate.  The major benefit of a triple net lease is the consistent monthly return without the hassles of being a landlord.  If you would like more information on triple net leases or the properties available, please sign up here, or call us at 312-265-8417.

For seasoned investors, what I’m about to tell you is nothing new, but often comes a surprise for newer investors.  In general, cash cow properties will not be prettiest property on the block, but running a successful real estate portfolio comes down to at least covering the monthly and unforeseen expenses.  “Aligator” properties as we call them, or negative cash flow properties take from investors bank account every month, opposed to contributing to it.  Some investors, are fine with this due to future appreciation, or because they plan to use the property as a vacation home.  This is commonly seen in higher priced markets such as California or New York.

For the average investor, a portfolio that produces a consitant negative cash flow, could inhibit their desired lifestyle, or even cause forecloses.  This is a problem that is currently plauging our country after so many homeowners lost significant value in their real estate portoflios.  The average investor is not able to take a 20% or more decline on their real estate portfolio and continue to make high mortgage payments on properties commanding lower rental amounts.  Do not make the mistake of buying a property on emotion opposed to the numbers and later regret your decision.  It generally takes a lot of good decisions to build wealth, but one poor decision can destroy a lot of wealth.

So how can real estate investors best protect themselves from getting into an alligator property?  The Lucrative Investor team has several measures and approaches it uses when analzying prospective deals.  One of the pillars that we use is price to rent ratio.  In general, if a property is priced at $150,000, we ideally want the property to command at least $1,300 to $1,400 a month in rent.  Investors in an ideal world would have a 1 to 1 price to rent ratio, where their property would command $1,500 a month in rent or more.  This is one general figure that indicates a strong factor for positive monthly cash flow.

Monthly expenses will make or break your prospective deal.  We pull our monthly numbers by acting as a renter our self.  What are comparable rents on craigslist for the area?  What is the average quotes from 3 to 5 property management companies that are located locally (we act as a renter opposed to a prospective owner because these companies want your business and often tell you what you want to hear opposed to the reality).  Beyond what the rental rate is, what will it cost to insure the property?  This can also be done by calling 3 to 5 insurance companies with an address and obtaining a written quote.  The same principal applies to taxes.  Call the assors office and figure out the property trends and taxes for the few previous years.

Conducting the proper due diligence will take some time, but it is time well spent to prevent yourself from adding an alligator property.  Once you have all of your numbers accurately estimated, simply run the math and decide if you can live with these monthly numbers and build a nice buffer account for any unforeseen expenses.

Evaluating real estate is pretty simple in principal and fairly stable and safe if the correct procedures are taken to calculate the cash flow.  After the first few times it will become easy to you and allow you to assemble a strong real estate portfolio that meets your desired cash flow needs.

The reason that so many investors both large and small seek non-performing notes is because of the extremely attractive pricing.  People hear stories all the time about a property that was purchased for 40 cents on the dollar or lower, but they are extremely hard to find.  The other barrier to entry for the average investor with non-performing notes is the cash involved to successfully close on a non-performing note.  Banks typically will not carry any debt on a non-performing note, which means investors have to be well financed in order to successfully close a transaction.

Non-performing notes are priced so aggressively because the bank has a wart on their balance sheet that is not only performing, but has not yet gone through the foreclosure process to wash out the liens and other clouds on the title that keep the property from re-structuring towards a performing asset again.  Often, non-performing notes involve a lot of work and will have plenty of obstacles to over come once purchased, but the bank realizes this and prices the asset very aggressively to sell.

One of the most recent non-performing notes the lucrative investor team was involved with was two mobile home parks located in the MI.  We all know that MI is one of the worst affected states in America from the auto industry with high unemployment, but mobile home parks are priced at the level where it’s average family can afford, plus the owners are only responsible for collecting lot fees, not home upkeep and other headaches involved with lower priced rental properties.

The key to this deal were outstanding numbers.  The previous loan within the past few years on these two properties was $18,000,000.  The investor who purchased this asset had the contract with the bank for $3,650,000!  Even at the 46% occupancy, it was operating at a 23% cap rate bringing in $73,000 a month income with the new debt piece only at $36,000!  Now that is a cash cow.

On top of that, the investor had two as is offers at $4,500,000 and $5,200,000 that could not get the deal themselves because the first group had it locked up in contract.  Hedge funds and other institutional investors have banking relationships like these where they are able to secure and close on deals for great prices.  They take the time and effort to clear the title of any clouds and get the property operating again at an acceptable level where they are able to re-sell a clean performing asset and makes in some cases millions of dollars.

Non-performing notes are usually not a rosy picture when it comes to the task at hand of re-managing a property to get it back to an acceptable performing level, but hardly any other asset can offer such aggressive pricing and strong rewards for investors.  As the housing correction continues to take place for the next several years, more and more opportunities will be available for investors who are well positioned and willing to take on risk for big rewards.

If you would like more information on non-performing notes or opportunities available,call us at 312-265-8417.

So if a single family home rents better and usually commands more in rent, why not buy single family homes every time?  Well, unless significant down payments are made, single family homes do not tend to cash flow as strong as mutli family due to higher price per square foot.  Also, in general single family homes command a lot more hands on attention than multi-family investments.

The Lucrative Investor team has had a lot of experience with investors and single family homes, which has been positive for the investor, but also negative.  The hands on investor who is very selective and hires the right property management company (if they do not live near by, which is usually the case) can do very well for themselves and enjoy the monthly cash flow.  Investors who are too busy, or do not want to be hands on in the process usually do not do very well.  Many investors have had to learn the hard way that hoping quality renters come and stay does not work!

Successful single family home owners have learned that good tenant relationships and up keep of their property will help lead to a profitable endeavor.  There is a fine balance between making an investment property too nice and not getting a return on your money, but also having a low rent place that will be difficult to lease in a competitive market.  The best way we have found when evaluating a rental property is to put yourself in the tenants shoes.  Sounds like common sense, but often investors will chose better home amenities or lower priced properties because they think it will cash flow better, instead of purchasing a property for more money where they would actually want to live.

When purchased correctly, single family homes can be a great way to build wealth and a cash flowing real estate portfolio.  The key to success is to fully evaluate your prospective property and compare it to other rental properties in the market to ensure that your property will be a desirable rental and also attract the type of tenant that you feel comfortable working with.

Before the tightening  of the credit markets, it was common for real estate investors to have up to 10 mortgages and in some cases more depending on their local banking relationships.  In today’s environment, it is uncommon to see investors who have more than 3 or 4 mortgages obtain a loan for additional properties even if the numbers make financial sense.

Typical multi-family investments are duplexes, triplexes (tris) and quadplexes (quads).  Multi-family investors often find that their units do not command rents as high as single family homes, nor do they see quite as much appreciation, but for buy and hold investors, or roll your sleeve up investors who are willing to improve a property and raise rents, they can be a fantastic investment.

Location of a multi-family property is one of the biggest factors in it’s future value and rental demand.  In areas with higher density such as cities, or college towns, multi-family properties are ideal for rental.  Tenants in dense markets do not expect, nor do they usually care about amenities such as a yard or garage that single family home owners desire.  They are more sensitive to the rental amount that fits their monthly budget.

Single family homes in dense areas often do not command enough rent to cover the expenses and create a positive net cash flow (this is common in markets such as California).  With lower price per square foot and multiple units, multi-family properties will typically allow an investor to generate positive net cash flow, or be close to neutral and take advantage of future appreciation, tax benefits and principal paid by renters.

A popular exit strategy for multi-family property owners is dividing units into individual units and selling them separately to maximize their sales price.  This process is called condo conversion and will have different rules and regulations based on the properties location and zoning requirements.  In most markets, a property owner will have to have their plans approved by the city council and inspected to meet requirements such as a firewall in between the units of the building.

The owner may also have to work with their lender to determine loan payoff, as they may have a due on sale clause in their mortgage contract.  This usually happens when more than 4 units are involved, as properties with more than 4 units will almost always have to be financed through a commercial loan.  Commercial loans are held by the banks that originate the note, or what is commonly referred to as “holding their paper”.  Commercial loans are more flexible in their terms, but usually have strict requirements about payment upon sale.

Multi-family properties can be a fantastic addition to real estate portfolios depending on location, condition and market factors.  Before purchasing a multi-family property, prospective buyers should conduct heavy market research such as average price per square foot, insurance and tax rates, as well as what realistically they demand for rent.  If the numbers pencil out and future of the location looks positive, it may be a purchase worth making.  Keep an eye in dense markets such as college towns and cities where renters tend to be more conscious about their monthly budget and people tend to rent longer before purchasing.

However, when I went to look at reviews on the internet about the hotel, the reviews were all bad. Some were bad for no reason, some were bad because the reviewer actually had a bad experience.

Now, here’s the problem I am having with places that have been reviewed on the internet, this particulary pertains to places on trip, hotel, and food review sites: People are more likely to complain than report a satisfactory experience. I am guilty of it: a lot of times, I end up writing about when something makes me angry or I am unhappy with a situation.

You will always have a few people who are going to report on how the situation was regardless of whether or not the experience was good; but more often people will complain than brag. Honestly, the entire situation isn’t very fair to the establishments.

For example, the hotel I’m staying at has particularly bad reviews. I believe on Yelp, this hotel is rated a 2 out of 5, which is not very good at all. It all has to do with the fact that there isn’t wireless internet for free in the rooms (which is stated on the hotel’s website and is fairly common knowledge in my opinion), parking isn’t free (but there aren’t many places in the downtown area that hae free parking), and the bathrooms are small.

I believe that most places should be given a fair chance and that you can’t go by what all the reviews are.

I have a love hate (but mostly hate) relationship with my land line. I really don’t want to get rid of it because I don’t always have cell phone service in my house and I don’t want to miss any important calls (and with my luck, the day I turned off the land line, I would get one of those important calls).

To help with my problem, I started looking into VoIP services. I’m sure that everyone has heard of Vonage. If you have cable, I’m sure at one point in time the company has tried to sell you on its digital telephone package (which is simply VoIP). There are many more providers than just this handful though.

After a brief Google search for VoIP providers, I found some really good deals out there. Most were cheaper than Vonage’s $24.95 a month.

You can choose what provider you want by the features you want. If you have friends or family outside the United States, then make sure you pick a plan that offers free calling to international numbers. Sometimes you can find services that offer calling for free to the UK and Europe.  Most providers offer free calling to Canada and Mexico.

There are also some providers that offer a reduced price for service, but it requires you to leave your computer on all the time. The Magic Jack is the most popular form of that. I wouldn’t use one because I don’t want to have to leave my computer on for days and days at a time, and like I said before, the one time I have to restart my computer, I’m sure I’d miss the call I was waiting for.

I just feel like no matter what you pick, if you have a high speed internet connection, you can definitely save money with a VoIP service versus a traditional phone line. You just have to make sure that your connection is reliable and always on. Also, don’t forget, if you have DSL you may not be able to get rid of your land line.

Don’t even get me started on the Google Voice fiasco that just happened and landed Apple in some hot water with the FCC….

Now the iphone application store has rejected a new application because the application allows the reading of the Karma Sutra. It is to be noted that the book reader Eucalyptus does not come with any books, but the K.S. is available for download onto devices and could be read at another time.

Whether it be the fact that Apple’s development team may decide that your application isn’t good enough for their devices or good enough to be released to their “cloud,” there are different places for software developers to go to have their programs viewed by many.

Apple has also been thinking of releasing a “net book” also. I suppose the net book would run like net books that run on Windows or Linux and are just able to run simple programs or surf the internet. Apple would undoubtedly make a net book that would be impossible to make programs for and far less powerful than any of the current mac books that are out there today.

The mac/pc commercials make me so mad because the pc just gives up when “the Megan” asks for a computer that doesn’t have software issues like crashing or viruses. Well guess what “Megan,” Mac’s have all those same problems too. As a matter of fact, I have been on a Mac many times in the past and gotten their version of a blue screen of death. I mean the iMac may have been the worst personal computer I have ever used, however there are so many people who think that the Macintosh name and product line is the best thing that has ever happened to the computer industry.

Whatever the reason, I think that people will enjoy PC’s and Windows mobile, Android, WebOS, and Symbian phones for much longer once the novelty of the iPhone wears off (like everyone knows it will).

When an employer has no sympathy for a potential candidate’s time it leads to frustration on the candidate’s part. Employers have been canceling interviews at the last minute with out a reason or an apology. Some are just wasting the candidate’s time by not paying attention during the interview and this is troubling because (and I should know) a candidate spends a lot of time preparing for an interview; this includes looking up the company and reading into the company’s philosophy and mission.

When an employer doesn’t share the company’s timeline to hire with the candidate it is also quite frustrating. A hiring manager always knows when they need someone. They know the time frame that they will be hiring in and not telling a candidate is annoying to all candidates.

Not sharing what kind of salary they pay is also really annoying, especially when they expect a candidate to give what they think they should be paid. There really isn’t any reason as to why a manger wouldn’t share this information. They really should give you some kind of range for you to expect to be paid and this would clear up the entire awkward situation that comes about when its time to talk money.

Finally, this one is the one that gets under my skin, when employers fail to notify a candidate that they are no longer up for consideration for the position. This is rude and extremely common. Many times a candidate sits by the phone (or in my case, shies away from a week vacation) to wait to hear from an employer. A simple email could do if the employer is no longer interested in the candidate.

Here’s one just from my own opinion book: If you’re an employer don’t tell a candidate to expect an interview and then don’t answer emails or the phone when the candidate calls. And give them an interview if you say you will.

The industries where jobs can be found include: Accounting, Information Technology, and even food service. This is all according to government data.

There are several surveys out now that are indicating that many companies won’t be hiring anytime soon, but a lot of the companies in the industries listed above will be looking for new recruits and are already out there actively seeking employees.

After shrinking for an entire year, four quarters in a row, the economy is expected to pick up a bit for the July through September quarter; this could lead employers to take away hiring freezes and start hiring people again. However, even with the new unemployment numbers out and showing a decrease in the total number of those who are unemployed, unemployment is expected to increase to 10% by the end of the year. Total job openings stayed steady through June according to the Labor Department.

Of course there are plenty of accounting jobs out there. The college I graduated from often boasts their 100% placement rate for accounting graduates. That number just seems crazy to me. After all, they just took a lot of the same classes I took to get through business school, yet most of them end up working in their field within weeks of getting their diplomas.

The United States and Canada came out on top with the highest levels of contamination of cocaine on paper money with between 85% and 90%. China and Japan ranked the lowest with only between 12 and 20% of their money being contaminated.

A similar study was conducted two years ago, and the new results prove that there is an increase of 20% from the previous study. Scientists have been aware of the contamination on banknotes. Paper money is used during drug deals and also when people are rolling it to snort cocaine. Then the money ends back up at the bank where it contaminates non-illicit drug money.

The levels of cocaine that showed up on the bills fell between .006 micrograms and 1,240 micrograms. As a reference, .006 micrograms is several thousands of times smaller than one grain of sand and 1,240 micrograms equals about 50 grains of sand. The scientists also noted that some of the cities tested definitely had higher contamination levels than others. Baltimore, Detroit, and Boston ranked among the highest contamination levels. Salt Lake City had the lowest in the United States.

If you were expecting to get something out of this you should probably move along. You’re not going to get high off a few dollars from your local bank. You won’t even have any health problems stemming from handling paper money.

It is also unlikely for any trace amounts of drugs that were on a bank note to end up messing up your drug test at work.

PowerPoint has been around for 25 years now, and while it was first geared toward people who had to present in business meetings and salespeople, the program has now become synonymous with anyone who has to give a presentation of any kind; no matter if you’re a salesperson or a 4th grader.

Over the past few years in college, I gave numerous presentations and PowerPoint presentations were not only expected, but required for all of them. However, after reading the expressions on people’s faces while giving presentations over the past few presentations I’ve discovered something: no one cares.

Perhaps it’s just presentations that people don’t want to go to, perhaps it’s the fact that PowerPoint slides often have too much information on a slide. Whatever the reason, I believe that it’s time for people to start coming up with more creative ways of giving presentations.

I think, especially for those in more creative fields, there should be requirements that they have to give presentations that are far more creative than a PowerPoint presentation; and no, I don’t mean passing out candy or throwing t-shirts at the audience. Marketing professionals are expected to be some of the most creative people in the business school and they’re giving the same presentations as accounting majors, something is wrong there.

Another problem I have with PowerPoint presentations is that the audience has become numb to the presentations. They have taught an entire generation how to stop paying attention. They have also taught that same generation how to rely so heavily on one program.

In the corporate world, people often turn something that can be said in two to five minutes into a 20 minute presentation because they feel as if they need to have the visual aid of a PowerPoint presentation. What a waste of time.

After spending months looking for a job, I finally found something working as a sales associate at a local department store. I’m making $10 an hour and averaging 30-35 hours a week. With an hourly rate like that I’ll barely be able to make my car payment and student loan payment, but at least I’ll be able to make them.

It’s a difficult market to find work in when 80% of the graduating class of 2009 weren’t offered jobs upon graduation and with many of us still out there looking for work.

It really is a full time job to try to find something; in my case it turned from a search for a dream job to a search for a job where I could earn something. Employers really do have the upper hand in this market, they know that they can offer you less money and that you’ll be willing to accept it only because work is so hard to come by.

I recently found a website that said those who graduated with a degree in business administration (just undergraduate) are earning an average of $42,000 a year. I’m getting no where near that number. After taxes, I’m lucky if I’ll be earning $12,000. As much as I want the sales experience so I may be able to get a job somewhere else in the future, I don’t know if this is something that I really see myself doing. The truth is, I really wanted to be making at least $20,000 a year while I lived in my current house and I honestly find the pay of $12,000 a year a bit insulting for all the work I put into college. Yesterday while I was sitting in the break area watching the training videos someone asked me why would I even consider working at that store when I had graduated college and had a business administration degree. I could only say, “because I can’t find a job anywhere else.”