Enclothing Our Thoughts

Do the clothes make the man (or woman)?

A recent study seems to support this idea. It has long been known that what goes on with your body affects how your mind works: If you force yourself to smile, you’ll understand jokes more easily; if you tense your muscles, you’re better able to resist tempting food or tackle a difficult task.

Having a mind-body link is one thing; but this study seems to indicate there is a mind-clothes link. The researchers tested the effect of wearing a white lab coat on people’s powers of observation. They found that people who wore the white coats made about half as many errors as people who didn’t. It didn’t work if the subjects thought the white coat was a painter’s smock, or if they just handled it. They had to think it was a lab coat and put it on.

This tells us that our clothes are an extension of our bodies. That $1000 Armani suit doesn’t just look natty–it also may help you mix more easily with the crowd; blue jeans aren’t just practical, they could facilitate creative thinking. Embodied cognition posits that human intelligence is about the interaction between mind, body, and the world. Clothes affect more than our mood. They seem to alter the way we think.

Clothes may not make us what we are, but they do have a powerful effect.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Yielding Answers

What can investors do about low interest rates?

It’s no surprise that interest rates are at record low levels. Over the past decade, 10-year government bonds in the US, Germany, and England have fallen from 6% to 2%. The drop in yields has provided great opportunities for capital appreciation from long-term bonds, but investors now are faced with a dilemma: continue to invest in long-term bonds and run the risk of a price decline, or go with short-term instruments that don’t even earn the rate of inflation.

Clearly, one reason for the decline in yields is that the pool of safe assets has shrunk. Mortgages are no longer considered risk-free; swaths of government debt have been downgraded due to economic and political troubles; even staid and sleepy municipal bonds are having problems, from Stockton, California to Detroit, Michigan.

But the demand for safe assets has not gone down. While the stock market has not seen a return to the heart-stopping volatility of 2008, every minor drop brings fears of “the big one” back to investors. Real-estate is no longer a safe-haven, and commodities are almost as volatile as stocks, while forgoing the dividend income that many blue-chip stocks generate. So demand for the stability of the bond market is strong.

Many income-oriented investors have turned to dividend-paying stocks as proxies for the bond market. Some large companies pay dividends in excess of 6%, and many companies with an historic commitment to dividend growth pay more than 3%. With 10-year Treasury Notes yielding 2%, these levels are attractive. But equities carry more risks than bonds, and they hold a junior position in the capital structure. As owners of Fannie Mae stock learned, insolvency can wipe out stockholders.

For good or ill, the only thing investors who need income can do is take more risk: equity risk with stocks, property risk with REITs, and commodity risk with Master Limited Partnerships and some ETFs. The world has changed; it’s not “different this time,” but long-term challenges will keep rates low. Investors should get used to this.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Swapping Places

What can we learn from the Fed’s swap lines?

Back in November the Fed made it easier for foreign central banks to borrow dollars. The European financial crisis was intensifying, and the Federal Reserve wanted to be sure that Societe Generale and Deutsche Bank didn’t fail because they ran out of dollars. But the Fed wasn’t going to lend to them—that was the European Central Bank’s job. So they expanded their swap lines with the world’s major central banks to allow them to borrow dollars from the Fed to lend to their own banks.

Currency swaps are pretty straightforward. The counterparty sells the Fed foreign currency in exchange for dollars at the prevailing market rate, while simultaneously buying them back at a specified rate in the future. That way the Fed isn’t taking foreign exchange risk; they’re taking credit risk, assuming the counterparty will be there in the future to buy their currency back. In the meatime, the Fed has the Euros as collateral, and those are exposed to currency risk only if the counterparty fails.

This is something the Fed also back in 2008, and swap balances soared—from nothing to almost $600 billion. As that crisis eased the swap holdings also went back to zero. In December last year the balances also grew, to just over $100 billion. It remained at that level until March, and has been steadily falling for the last six weeks. Currently they’re about $32 billion.

This tells us that liquidity pressures on foreign banks are easing. The swap facilities didn’t increase the global money supply, and so global prices didn’t like they did in late 2010. Foreign banks may need more capital in the long run, but they’re not facing imminent failure. If they were, we’d see it in the data.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

It Doesn’t Work

Buried in the Social Security report is a train-wreck the next President will face.

When Social Security issued its annual report this week, most people focused on the retirement fund’s solvency. It reports that it will run out of money by 2033. Actually, that projection is optimistic, but that’s another story.

But there’s another part of Social Security facing more immediate challenges: the disability fund. This program offers essential support for people who have no chance of holding another job. Currently, 16 million adults and family members receive $162 billion worth of disability payments each year.

It’s grown dramatically recent years in spite of a healthier population and a safer workplace. Originally it was hard to qualify, but congressional mandates now allow hard-to-disprove factors like anxiety or back pain to let people in. Once people start receiving payments, they almost never reenter the workforce. The report now estimates that it will be depleted by 2016. Something needs to be done.

The good news is that the fund’s insolvency isn’t that complicated. Congressional mandates created this mess, and they can fix it. Changing the rules may seem cruel or heartless, but there are common-sense reforms that could help: incentives to return to the workforce, risk-scoring employers, requiring medical certifications. These would help the fund and help the general economy.

But an easy fix would be to simply allow the disability fund to borrow from the general SSI fund, weakening that fund and accelerating its decline. Hmmm: fundamental reform, or a fiscal reshuffling—which do you think Congress will chose?

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Lie Detectors Needed!

Looks like Wal-Mart could have used one of those lie detectors.

Ten years ago Wal-Mart was looking to expand in Mexico and ran into some bureaucratic trouble. Opening new stores was difficult. Zoning permits, impact statements, building permits, traffic studies—they were all taking too long. So they hired local lawyers to “fix” things, which in the developing world means that probably graft was involved.

Soon, a familiar story ensued: an employee involved in the expansion was passed over for a promotion, so he went to the senior brass in the US with allegations of bribery and corruption. The brass investigated, but the people they sent down there had lots of experience in law enforcement and little in Wal-Mart’s corporate culture and a few feathers got ruffled. A new investigator was put in charge—one who might have been implicated in the first place. His report was far from adequate, but the payments to local “fixers” stopped. Headquarters let the matter drop.

What happened next is atypical: the whistleblower also dropped the matter. He didn’t carry on his crusade to the next level. It wasn’t until late last year—six years later—that the issue surfaced again. Indeed, the company disclosed in their annual report two months ago that they were reviewing their compliance with the Foreign Corrupt Practices Act.

Working in other cultures is different than in the US. A tip one place might be a bribe somewhere else, and it’s often hard to tell the difference. But Federal Justice Officials are involved now, and they will take a hard look at both the events and the investigations. Wal-Mart is a tough competitor in a rough business with a big target on its back. They can’t afford this kind of distraction, and they’ll probably settle the charges.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Lie Detectors?

Do poachers make the best game wardens?

An old saw states that if you want to protect against break-ins, get advice from a burglar. If you want to improve cyber-security, hire a hacker. But is this always a good idea? Do the skills that make for a good criminal make for a good cop? At least one study has shown that deception follows this model. People who lie, and perhaps lie easily, are also more readily able to detect deception in others. The ability to lie seems to be linked to the ability to detect lies in others.

A small study in England monitored some adults as they played a game in a study lab. The participants rated by the others as most credible or most accurate each got a prize, even though they were instructed to lie to the others half the time. It was sort of a group-rating system for truth-telling. The folks who were most convincing when they lied tended to be the most perceptive of others’ lies.

One issue with the study is that because all the participants knew that they had been instructed to lie, they also knew that they were being lied to much of the time. That’s not always the case in real life—when someone is lying, you don’t know if they are and your lie-detector apparatus may not be engaged. But life is full of deception. People who can figure out when and where they are being deceived have significant advantages in business, politics, academics, medicine, or just about anywhere that people interact.

Character is destiny, though. Working with a skilled deceiver is a dangerous game—they need to be hedged about with all sorts of safeguards everyone’s protection. Deception may be useful in the short-run, but reputation is essential in the long-run. And a good name, once lost, is almost impossible to retrieve.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

US Scareways

And old joke: what do you get when you cross an elephant with a rhino? Elephino!

That’s what I thought when I read about the proposed merger of American Airlines with US Air. American is in bankruptcy; US Air is a scrappy legacy carrier. After Delta merged with Northwest and Continental and United united, rumors were widespread that American and US Air would get together, but they could never agree to terms. Before, American would be the buyer. Now it’s US Air. But the combined airline would take the American name, and tens of thousands of jobs would be saved.

But US Air is no white night. It has cost problems of its own. It’s not clear that the combined entity will be stronger. The airline industry suffers from over-capacity and volatile jet fuel prices, along with massive regulation and an exacting mission. Running an airliner isn’t for novices. Watching the two fiscally challenged companies combine could be like watching two drunks try to walk home by leaning against each other. It usually doesn’t work.

In fact, the airline industry hasn’t been profitable since it was deregulated back in the ‘70s. Most consumers don’t mind: rates are one tenth of what they were, adjusted for inflation; there are more options to more cities; and safety has never been better. The folks struggling are the people that are part of the industry—labor, management, and investors.

But is a new thing: a merger to save jobs. Will it work? Don’t hold your breath.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Spanish Fleas

The pain in Spain stays mainly in the banks.

Okay, it doesn’t rhyme. But the point is that the crisis in Spain isn’t one of sovereign excess or overly-generous pensions. It’s about the banking system. During the boom, property prices soared as wealthy Britons and Germans bought vacation condos on the Costa del Sol. But when prices turned south the banks got hammered. Now over 8% of Spanish banks’ loans are nonperforming, and the assumption is that the country will have to come in and rescue them. That’s a problem; the three largest banks have $2.7 trillion in assets—twice the size of Spain’s economy. Spanish banks aren’t too big to fail, they’re almost too big to save!

By contrast, Spain’s government debt is only about 70% of its economy—considerably less than the US or most other European nations. And the European elites do have a grand plan in place. It involves supporting the banks with central bank liquidity, reforming labor markets to encourage economic growth, and reduced spending on current expenditures, along with some tax reform. But reform is hard when unemployment is 24%. Still, public support for the Euro is strong.

So Spain’s banks are in trouble and the government is on the hook. They might need as much as $100 billion—8% of their economy—to shore them up. As I wrote before, though, banking is only part of the Europe’s three-fold problem, while in Spain, it’s the main issue. The weather in Spain may clear, but the markets can see a lot of turbulence ahead.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Alma Matters

Why are US colleges and universities so successful?

In a recent study of global universities, institutions from the United States occupied 17 of the top 20 spots, based on academic reputation, graduate accomplishments, and academic journal citations. While the US has a large and relatively wealthy population capable of supporting its universities, this kind of dominance is striking. What can explain it?

One possible reason is alumni involvement, control, and generosity. Continue reading Alma Matters

Here (Doesn’t) Come the Sun

Sometimes good intentions just aren’t enough.

First Solar makes thin-film solar panels. The Tempe, Arizona company has manufacturing plants around the world. Before the credit crunch when subsidies were plentiful and new housing construction was booming, the company was riding high. The price-earnings ratio was over 100 and earnings were doubling year-by-year. Even after the bloom came off the rose and both earnings and the share price fell, the company still enjoyed a PE of 20 and earnings, while not growing, were stable.

Not any more. In the midst of a fiscal crunch, government subsidies have gone away. The company’s most profitable product, tax-credits that could be traded between unrelated parties, depends completely on fiscal largesse. And those days are over.

So the company is shifting its strategy away from generic roof-top units, firing 30% of its workforce and exploring strategic opportunities. The shares have fallen 90% over the past year. Large institutional shareholders have been selling. Now the company is looking for a way forward that doesn’t depend upon tax credits.

I wish them well. Heaven knows we can use all the different energy sources we can get; developing new technology so it is ready to go once electricity prices rise seems sensible. But with so many alternative energy companies failing or restructuring, it’s too bad so many people lost so much money on so much hype. “Hope” is not a sound investment strategy.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net