Market Flash Commentary

Testing New Lows

As I sit here and write, the major stock market averages are nearing the lows set back in November. There is no mistake as to what is driving this latest down move. For several weeks the markets have been deluged with bad news and uncertainty.

Among those concerning topics are the massive stimulus bill, the second half of the TARP program, unemployment data, near-term deflation, long-term inflation, constrained lending, foreclosures and more. With each new headline there follows some quick analysis in the media. The problem with most news outlets is that each topic is only afforded five minutes or a couple of columns of coverage. It’s important to realize that most of the concepts that are driving the negative market sentiment right now are very complex issues that are well above the head of most reporters and surely take longer to explain than five minutes. In many cases these media reports are highly political publications ripe with misinformation.

In our effort to keep our clients informed, we wanted to take this opportunity to cut through the clutter and share with you our thoughts on the three most important components of the recovery efforts.

The Stimulus Bill

The federal government has just enacted the largest spending bill in the history of the nation. In addition, governments around the world are enacting their own stimulus programs. Ultimately, the goal of any stimulus plan is to fill the void in GDP left by the reduced spending by businesses and individuals. There are numerous problems with these programs.

First, it’s difficult to gauge the appropriate size for a spending package. In theory the level of government interaction should be just enough to offset the private sector shortfall. This is about impossible to measure. You’ll hear a lot of debate about whether or not the plan is too big or too small.

Another issue is that all spending is not alike. Ideally, you would want to inject money in a way that would encourage job creation in the private sector. This is the action that will have a lasting effect. Transfer of payments, where the government simply takes money from one entity and gives it to another, is not helpful in creating sustainable GDP.

The stimulus bill wasn’t written by economists, but instead was written by politicians. As such, there is a lot of wasted money being thrown around. The wasted money, which I estimate to be about two thirds of the package, may have a simulative effect in the short term but once those monies are gone the hole in the GDP will reappear. This is one of the lessons from the New Deal era. Temporary spending will only postpone the inevitable.

Hopefully, the economy will show signs of recovery before much of the money is spent in 2011. We then would have the chance to withdraw that portion. Either way, any benefit from this bill won’t likely be felt until late this year or early next year.

TARP II

The markets are looking for immediate help, and we believe the second half of the bank bailout is where it will come from. The current downdraft in the stock market can be traced back to the latest round of TARP planning, or lack thereof. There has been such an absence of guidance as to how the remaining funds will be used that banks and investors have been left paralyzed.

It is important to understand that this legislation and funding is separate from the stimulus bill. The first round of TARP financing was originally meant to buy troubled debt. As we have written many times in the past year, there is a lot of sound reasoning behind this idea. Removing this debt from the balance sheets of financial institutions and creating an active market in these securities would help the overall markets considerably.

For various reasons, the first round of TARP money ($350billion) was instead directly injected into banks via the purchase of preferred stock of those banks. This action was not necessarily gratuitous but it was not in keeping with the original proposal made to Congress.

Since then questions have been raised about the effectiveness of the first half of TARP funding and what the new administration plans to do next. So far only goals have been announced. We have yet to be shown a plan.

There has been such uncertainty that no one even knows what to call the program anymore. The latest version is the Term Asset Backed Securities Loan Facility (TALF). This name implies that the Treasury Department is refocusing its efforts on jumpstarting the market in asset back securities including those backed by student loans, mortgages, and credit cards.

We believe that of all the recovery plans floating around, this one stands the best chance of really making a difference. For one thing it is the least politically influenced. It is also being crafted by economists in consultation with the private sector.

Hopefully a definitive plan will be announced within weeks. Assuming the market likes what it hears, we would expect a strong short-term rally in equities once a plan is put in place.

Housing Foreclosure Bailout

Dealing with the rising housing foreclosures has also become a hot potato. The debate crosses philosophical, economic, and political lines. Our guess is this aspect of the stimulus debate will ultimately have the least amount of influence on a recovery.

Foreclosures may be on the rise, but still 93% of mortgages are just fine. With nine out of ten people acting responsibly, it’s hard to imagine a bailout of those who are in over their heads to get much political traction. Our guess is that any legislation in this area will be limited in scope.

It is estimated that there are an annual 2 million new homes needed in this country due to demographics. Housing is the one area that will fix itself given time. As prices come down demand will rise. We’re already seeing this in some areas of the country that have experienced the biggest declines in prices.

We don’t agree that everyone who is “upside down” on their mortgage will just walk away from their home. Developers and speculators would be far more likely to default, but they represent a relatively small percentage of property owners.

In Conclusion

Last year we summarized the economic environment as one in which the entire globe was deleveraging. Nothing has changed from then. Virtually every development we’re experiencing today can be attributed to a world downsizing. Individuals and businesses are reducing their debt, spending less, and saving more.

The short-term result is a swift contraction in GDP, and the fallout will be fewer items manufactured and bought. Demand for long-term assets will be temporarily depressed as assets backed by debt are unloaded.

These effects are unavoidable. The government’s job should be to help ease these effects, but they cannot make them go away. We pray that the government’s activities don’t saddle the economy for years to come with the unintended consequences of spending billions of dollars.

We are far less concerned with the Federal Reserve’s activities. While they have greatly expended their balance sheet, the Fed’s actions are far more short-term in nature and can be easily removed as economic conditions improve.

Contrary to the terminology loosely thrown around in the media, the Fed is not spending billions of dollars. They are, in fact, investing billions of dollars or guaranteeing billions of dollars in securities. They are also being paid dividends and interest on those monies. The Fed has openly said that it expects to earn money on its investments. Today Bank of America made a $402 million dividend payment to the government on their TARP preferred shares.

I find it amusing and a little disingenuous to hear politicians talk of “investing” in education, job training, and the like when they are really spending money. But when the government does actually invest in something such as TARP assets, it is referred to as spending.

Unlike TARP, the stimulus bill is plain and simple spending. The only hope to get something in return on those dollars is if the spending spurs developments that will increase future tax revenue. We’ll see.

The media and the government tell us that the American people are causing this “meltdown” by reducing their debt, saving more, spending less, and accumulating cash. Is this really a bad thing? As a nation we are acting more fiscally responsible. We haven’t done that in a long time and it’s a shock to the system. You have to wonder if the solution is for the government to then fill the void by acting irresponsibly.

Yes, this shift towards saving more and spending less has caused short-term economic pain. Let’s try to minimize the current pain while the country goes through rehab, but let’s also hope this responsibility trend continues. We’ll be much healthier in the long run.

Market News

A Year of Change

2008 will certainly go down as a year of change. Whether it is by choice politically or forced financially, things will definitely be different as we move forward. 2008 will also be remembered as the year that permanently changed Wall Street.

We would sum up 2008 as the year in which the U.S. received a massive margin call. Across the economy, wary lenders demanded that borrowers put up more collateral or sell assets to reduce debts. For years, the U.S. economy has been borrowing from cash-rich lenders from Asia to the Middle East. American firms and households have enjoyed readily available credit at easy terms, even for risky bets. No longer.

The aftermath has left us with tighter lending standards, a financial system under-capitalized, and trillions of dollars worth of securities (at issue) that no one seems to be able to correctly value. The result is a slowing global economy that hasn’t found a bottom. Throughout most of the year stocks proved remarkably resilient to the bad news. That changed dramatically in the fourth quarter.

Going through the numbers, all of the major stock averages were down substantially at the end of the year. The S&P 500 was off 38%, NASDAQ down 40%, Dow Jones 30 down 33% and the Russell 2000 off 34%. European and Asian markets fared even worse, declining between 45 and 50%.

As we’ve written over the past year, bonds didn’t offer much of a hiding place either. Most issues saw their prices decline as risk was re-priced in the market place. There is still no market for a wide range of asset-backed bonds. Even the normally boring municipal bond market took a hit when the bond insurers lost their AAA ratings. Treasury bonds were the only exception to this retraction as invertors sought safety over anything else.

Many lessons can be learned from the experiences of last year. Among other things, those lessons include the dangers of excessive leverage, the interdependence of our financial institutions, the importance of transparency in the markets, and the unintended consequences of government policies.

It is yet to be seen how the regulatory landscape will be changed as a result of the past year, but it surely will. There are two observations that can be made regarding the financial system regulatory environment. The first is that it is highly unlikely that government regulations can keep up with the speed of evolution in the markets. Some of the most significant trading venues today were only niche markets a few years ago. Secondly, it is unclear how many of these problems can be legitimately attributed to a failure to regulate.

Government’s never ending desire to get bigger would have us believe that the solution to avoiding this kind of pain in the future is increased regulation. However, it’s interesting to note that if you were to rank the severity of problems in the system, you would find that the most affected companies and industries are also the most regulated.

We believe systemic changes in the financial markets are what is most needed, not increased oversight. An obvious and necessary change is for investors to require issuers of asset-backed bonds to continue to have some culpability after the securities are sold. Underwriting standards would be greatly improved. Also, markets that are large enough to pose an economic threat should be transparent and have a central clearinghouse that would allow others to gauge the inner dealings. Accounting rules should better address how to handle pricing securities that don’t have a liquid market.

These are not necessarily regulatory changes in oversight, but instead are changes to the way Wall Street does business. These types of changes do need to be initiated through legislation. There are plenty of oversight rules in place. The problem seems to be how well the overseers are doing their job, which leads us to the next subject – scandals.

Show me the Money

Times of stress always expose the weaknesses in a system. So it goes with the current market crisis. Among all of the bad news in the financial markets, one of the most shocking developments was the self-disclosed Ponzi scheme run by Bernard Madoff. The reported 50 billion dollars in losses was yet another blow to the already shaken markets. Not only are these losses the largest ever of this type, but they impact an amazing array of individuals and institutions.

One of the more surprising elements of this case was the apparent failure by the securities examiners to catch this scheme in the twenty-plus years it continued to grow. Throughout those years there were a number of clues that something was amiss. The most obvious clue was the remarkably consistent returns by the fund. These supposed returns spanned both good times and bad. This time period included the collapse of Long Term Capital, the global currency crisis of the mid 1990’s, and the bursting of the tech bubble in which the overall market lost half its value. During those same times the fund reported double-digit returns year after year. This incredible performance is what allowed the fund to attract so many assets.

The secretive nature of the fund’s investment techniques led other managers to question the ability of Madoff to generate such consistent returns. Several people went so far as to raise these questions directly with the securities regulators only to be dismissed. Now that the scam is out in the open, fingers are being pointed in every direction.

How could this have gone on for so long? While the details are only now emerging, there are two factors which could account for the ability of Madoff to deceive so many people. First, investor greed led many people to suspend their critical thinking because they wanted to believe that this was easy money simply there for the taking. Secondly, Madoff owned both the fund management company and broker/dealer that held the accounts. This meant that he was both reporting the performance and generating the statements to back up those performance claims.

The two lessons from this scheme are: 1) The importance of asking hard questions when your investment manager is always making money regardless of the market conditions, and 2) the need for checks and balances in monitoring your portfolio performance.

You should always be concerned when your managers’ performance is radically different than their benchmark over time. This means they are doing something very different than that benchmark. While this can be good when the benchmark (aka, market) is going down, that strategy should not work when the benchmark is going up. Conversely, a strategy that is greatly over-performing in up markets should get clobbered in a down market. Managing risk should be accomplished through asset allocation and not changing strategies within an asset class. When investors see this, they should be prepared to ask a lot of questions and get specific answers. Your investments should never be a “black box”.

Never underestimate the need for checks and balances. Whether it is intentional or not, mistakes can happen. You should always know what controls are in place to protect your assets and accounts. A good example in our business is the role of the custodian, which for our clients is Schwab. We report positions, performance, trades, etc to our clients at least every quarter. What we send out can be independently verified by the statements and trade confirmations our clients get from the custodian. In the Madoff case, his company was generating both, which as you can see is a major conflict of interest.

We reconcile our portfolio balances and activities to Schwab’s reports every day using software that is completely independent from theirs. So if there is ever a difference, our staff indentifies why and what to do about it the same day. While rare, the differences are almost always due to timing of payments. We adhere to the principle put forth by Ronald Regan as he would say about arms treaties, “trust but verify.”

Another troubling aspect of the Madoff case is the fact that no one really knew what his fund owned. Even the other investment advisors directing their client assets to him didn’t know what his fund was doing or what investments it owned. As investment managers ourselves, we cannot imagine putting our clients in that situation. This is every bit as egregious as Madoff’s thievery. Unlike Madoff and the many financial advisors who kept their clients in the dark, we believe it is important for you to understand the strategies we are employing and know what securities you own.

So What Do I Own?

We attempt to send out commentaries and articles on a regular basis because we want you to understand the activity occurring in your portfolio as well as the securities it contains. You may have noticed a few consistent investments in the core area of the equity portion of your portfolio, and we want to alleviate any confusion as to what these core mutual funds and exchange-traded funds are designed to achieve. Some focus on capturing the broad market while others are more focused.

While each client’s personal situation is different, we include these few common investments and strategies in almost all of our client accounts because they are broadly diversified and thus less volatile. However, we want to stress that we do not use “cookie-cutter” accounts in which each portfolio contains the same investments in the same amounts. We simply include these investments as the backbone of your portfolio due to their well-diversified nature and then structure the rest of your portfolio around these investments based on your individual circumstances. The exposure to these holdings will vary from one client to the next, as it should, but we still wish to take this opportunity to explain exactly what these common investments are and what they seek to accomplish.

SNXSX – Schwab 1000 Select Index Fund

Indexing is an important component of any diversification strategy, and that is what this mutual fund from Schwab is accomplishing. The Schwab 1000 consists of the 1,000 largest companies in the United States, and the index is designed to be a measure of large-cap stocks. What is large-cap and why would you want a large-cap mutual fund? Market capitalization is a measure of public consensus on the value of a company, so bigger companies carry the investor sentiment that these companies will continue to survive and thrive. Large cap companies also became large for a reason, usually attributable to significant competitive advantages and domination in their respective markets that will most likely continue. Therefore, your equity portfolio is heavily weighted in large-cap indexed assets because these stocks are proven strong performers.

We chose this particular large cap mutual fund because it has very low fees and high diversification across a very large number of companies, thus reducing risk. You might wonder why we chose a fund run by Schwab, but the company that operates the fund is generally unimportant because the fund is not actively managed by a portfolio manager. In other words, the fund owns a set of stock and the fund changes value as the stocks it owns change value. No one at Schwab or any of the other following companies are buying or selling securities in the fund each day. This is a positive situation because it means you do not have to rely on a portfolio manager to perform. You must simply rely on the companies contained in the fund to perform.

MDY – Standard and Poor’s MidCap 400

The large, mid, and small-cap indexed components in your accounts can be seen as the building blocks of a diversified equity portfolio, and this S&P MidCap 400 exchange-traded fund is the main mid-cap element. We use MDY because it carries the inherent advantages of being an ETF; low fees and simple trading rules. This particular ETF consists of 400 mid-cap companies chosen based on their size. While mid-cap companies have proven their worth and are still quite large relative to all companies in the country, they are smaller than their large-cap counterparts and thus carry slightly more risk. However, with higher risk comes higher reward, and this mid-cap holding tends to outperform large-cap holdings during periods of growth. But even with this somewhat increased risk due to smaller companies, this ETF avoids company-specific risk by diversifying across many mid-cap companies.

SWSSX – Schwab SmallCap Index Fund

The final portion of your main equity holdings will be this small-cap indexed fund. This fund invests in 1,000 of the largest stocks that can still be classified as small-cap. Many of the stocks in this category will eventually grow to be re-classified into the mid-cap and large-cap groups. While this mutual fund carries more risk than the large or mid-cap holdings, the fund is sufficiently diversified across 1,000 companies, thus reducing the risk intrinsic to investing in small-cap stocks. While we wish to avoid the high risk of investing in individual small-cap companies, we take advantage of the high possible returns of small-caps by investing in this well-diversified fund.

DLN – WisdomTree LargeCap Dividend Fund

Like the Schwab 1000 fund, this ETF also focuses on the large-cap portion of the stock market. However, the WisdomTree LargeCap Dividend fund chooses companies based on their dividend rather than their size. Basically, WisdomTree looks at the total universe of stocks, and then chooses 1,200 with steady and high dividends. Then, WisdomTree takes the top 300 large-cap companies from this list, resulting in a group of well-known companies with high dividend payouts. The fund accomplishes two goals; it includes only large-cap and thus less risky stocks, but it also provides a healthy cash flow due to substantial dividends. Investing in dividend-paying stocks has historically proven to be a winning strategy in the stock market because dividends have historically made up half of the market’s total return. This fund allows us to capitalize on that strategy without exposing your portfolio to the risk of individual companies.

DON- WisdomTree MidCap Dividend Fund

This ETF is very similar to the WisdomTree LargeCap Dividend fund, except it focuses on the mid-cap portion of the market. It operates by again looking at the list of 1,200 dividend-paying stocks, removing the 300 stocks included above in the WisdomTree LargeCap Dividend fund, and then taking the next large chunk of stocks that would classify as mid-cap size. These companies have reliable dividends and the ETF is diversified across more than 600 companies.

DES – WisdomTree SmallCap Dividend Fund

Again, this ETF follows a dividend philosophy, but it contains small-cap stocks from the list of all high-dividend paying stocks. While any small-cap fund is more risky than the mid-cap or large-cap holdings, the fact that these stocks can afford and are willing to pay a dividend despite their small size is a great sign of financial strength. Therefore, we believe this ETF will provide the opportunity to receive income through dividends, reduce the risk that might be present in other small-cap stocks, and potentially make larger gains than are possible with large or mid-caps.

DWM – WisdomTree Dividend Index of Europe, Far East Asia, and Australasia Fund

This is a dividend-weighted fund that includes dividend-paying companies in the industrialized world outside of the United States. It is comprised of over 2,300 companies from 21 countries, including 16 developed European countries, Japan, Australia, New Zealand, Hong Kong and Singapore. As you can see, this is a highly diversified ETF with the intention of gaining international exposure while reducing the risk of adverse events in individual countries. While the fund contains large, mid, and small-cap companies, 70% of the companies are large-cap. Thus, the fund includes the most successful companies from each of the countries. We believe diversifying outside of the United States is a smart idea because it reduces the risk of being invested in only one country, and it also allows investing into foreign markets that are expanding.

EFA – MSCI Europe, Australasia, and Far East Asia Fund

This indexed ETF is very similar to the WisdomTree international dividend fund, however the MSCI Europe, Australasia, and Far East Asia (EAFE) fund includes companies based on size rather than dividends. It consists of companies from the same 21 countries as the WisdomTree fund, but it simply ranks companies based on size and chooses the largest. This fund also avoids emerging markets, and it is well diversified. While we could have chosen to only include the WisdomTree fund or the MSCI fund, we chose to include both a dividend-weighted and capitalization-weighted international fund in our accounts to attain increased diversification and less risk.

EPP – MSCI Pacific ex-Japan Index Fund

This ETF is unique in that it diversifies your portfolio into the Far East pacific regions of the globe. It includes companies from 9 countries: China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand. So why does the fund exclude Japan? The simple reason is that the fund is attempting to focus its attention more southward than Japan, but also Japan is included in many other MSCI international funds and this fund provides an opportunity to diversify away from Japan. While this fund is more risky than the very large and extremely diversified global funds listed above, the MSCI Pacific ex-Japan ETF provides an opportunity to get invested into a region that shows great growth potential.

ILF – S&P Latin America 40 Index Fund

So what about this side of the globe? We are diversified in the western hemisphere as well. The S&P Latin America 40 ETF represents major companies from the Mexican and South American markets. The index draws from the four major Latin American countries: Argentina, Brazil, Chile, and Mexico. South America has recently shown great growth, and as these markets become more developed and industrialized, they will grow even more. We chose this particular fund because it includes only the very largest 40 companies from a region that could otherwise be more risky. These 40 companies are the strongest members of their respective segments of the market in Latin America and South America.

SDS – UltraShort S&P 500

The UltraShort S&P 500 exchange-traded fund is one of our most important hedging devices because it seeks to provide the opposite of the S&P500, times two. So, the ETF attempts to protect against losses on your core equity holdings by returning twice the opposite of the market. For example, if the S&P500 moves down 3% in one day, the UltraShort fund moves up approximately 6%. SDS is a great hedging tool during difficult market times because it moves upward as the general market posts losses. SDS alleviates some of the downward pressure on your equity portfolio.

Summary of Portfolio Positions

In response to the difficult economic conditions this year we have made significant changes to our equity allocations. First of all we have greatly reduced our equity allocation overall. Next we have reduced or eliminated the company specific risk by moving away from individual stocks and using indexed ETF’s. Lastly, we have spread our equity exposure around the globe to help reduce the volatility of any one currency.

Of course, the previous equity descriptions do not include the fixed income allocations present in our client portfolios, such as bonds or alternative fixed income. These also serve to reduce volatility and provide income during these difficult times.

What's up in Washington? (February, 2009)

What is really going on in Congress and the White House? In the past year, the word "change" has become the most overly used word in the English language. But what change will actually occur and how will it affect your life? President Obama made over 800 campaign promises... it is impossible for him to deliver on every one of those promises in only four years. But however you feel about the new administration, some things are about to change. I have sifted through the media muck to highlight the probable affects of this new administration and our new Congress. I am pleased to present the top 10 ways Washington will affect you in the next few years:

1) It’s all about the ice cream. Now what does that mean? To explain, I will simply relay a story that I received as an email forward. This story was first told by a teacher in the Nashville area:

"The most eye-opening civics lesson I ever had was while teaching third grade last year. The presidential election was heating up and some of the children showed an interest. I decided we would have an election for a class president. We would choose our nominees. They would make a campaign speech and the class would vote.

The class did a great job in their candidate selections. Both candidates were good kids. The day arrived when they were to make their speeches. Jamie went first. He had specific ideas about how to make our class a better place. He ended by promising to do his very best. Every one applauded. He sat down and Olivia came to the podium. Her speech was concise. She said, "If you will vote for me, I will give you ice cream." She sat down. The class went wild. "Yes! Yes! We want ice cream."

A discussion followed. How did she plan to pay for the ice cream? She wasn't sure. Would her parents buy it or would the class pay for it? She didn't know. The class really didn't care. All they were thinking about was ice cream.

Jamie was forgotten. Olivia won by a landslide.

Every time the government offers ice cream, fifty percent of the people react like nine year olds. They want ice cream. The other fifty percent know they're going to have to feed the cow and clean up the mess."

Unfortunately, this story sums up the first big change coming out of Washington... Some people will get ice cream and the other half will be left cleaning up after the cow.

2) Tax relief for some and pain for others. The Obama Administration plans to keep the estate tax even though it is scheduled to expire in 2010. This will hurt wealthy people, since the wealthy are the ones with an estate to tax. However, the White House has included a series of tax cuts in the $850 billion stimulus plan which you may be able to take advantage of.... a tax credit of $500 per worker or $1,000 per working couple. Those tax breaks would phase out for individuals making more than $75,000 a year and for couples making more than $150,000 a year. The stimulus plan also intends to add $70 billion in tax cuts for middle-class taxpayers stuck paying the Alternative Minimum Tax. And finally, President Obama has expressed a desire to wait to implement his tax hikes on the wealthy, which is a good sign. But the tax increases will come eventually, probably in 2010 once a recovery is underway.

3) Overhaul of the healthcare system. There are so many billions of dollars earmarked for healthcare projects that I cannot even begin to list them now. But in the end, Medicare and Medicaid are set to expand by over $100 billion. Also, the Administration wants all Americans to have access to healthcare... even those with pre-existing conditions. This is equivalent to crashing your car into a tree and then calling Allstate for insurance coverage of that wreck. In reality, you cannot buy an insurance policy on something you have already wrecked... unless it is your body and you are poor enough to qualify for it. The private insurance companies may not be able to afford these costs, so patients with pre-existing conditions could end up on a government funded program.

4) Your energy bill will go down! But this is after $59 billion in spending on energy and our power grid with benefits not being seen until 2011. However, an updated power grid and energy system would strengthen our nation's competitive advantages.

5) A more competitive public school system for our children. Now this is a cause I can get behind. The President has supported pay-for-performance public schools. Our schools would greatly benefit if our best teachers were nicely compensated... because other teachers would find an incentive to work harder and become better teachers too! He also supports the rights of parents to decide which schools their children attend.

6) Breaks for businesses, but mostly for losing companies. While I cannot understand the thinking behind only rewarding those who are failing, I'll take what I can get. The stimulus plan includes a provision to allow money-losing companies to carry current net operating losses back 5 years instead of 2 to reduce tax liabilities in previous years (and maybe get some money back now!) Loss carrybacks are similar to loss carryforwards, except companies apply their net operating loss to preceding years instead of subsequent years’ income. For example, if a company had a loss of $1,000,000 this year but had a gain of $1,000,000 five years ago, the company could apply this year’s loss to the gain five years ago and wipe out the tax liability five years ago. Since the company paid taxes back then, the company should get a refund. The stimulus plan will also offer relief for companies investing in new plants and equipment as well as those hiring youths and veterans. Any stimulus for business is crucial right now.

7) "Cut taxes on all Americans making under $250,000 a year." Not exactly. When the Bush tax cuts expire in 2010, taxes will rise on everyone and probably settle around Clinton-era levels. And the $250,000 number is probably going to be lower, but no one knows exactly what it is going to be.

8) The South becomes the new Detroit. While the stimulus bill has preoccupied most people’s minds lately, I have not forgotten about the bailout of GM and Chrysler. The magnification of such major problems in Detroit served to also magnify the success of car manufacturers in the South. An interesting development that has already been under way in recent years is the South’s new role as host to foreign-owned automobile plants. But foreign-owned does not mean foreign workers, and the car companies that call Georgia, Alabama, Mississippi and other Southern states home employ thousands of Americans. In fact, two-thirds of foreign cars are actually built in the South in nonunion shops where it costs at least $2,000 less to build each vehicle than it does in Detroit. And to make matters worse for the Big Three, GM supports 400,000 retirees while Toyota only supports 700 because the Southern autoworkers are a fairly young population. But there is good news… GM, Chrysler, Ford, and Congress are catching on! The South is the place to be to build vehicles due to a small union presence, lower taxes, and a welcoming attitude towards automobile plants. The South is becoming the new Detroit, which is a boon for small Southern towns that are supported by automobile plants.

9) The government enters the hedge fund business. TARP could be renamed “The United States Hedge Fund” because it would more aptly describe what the bailout money is accomplishing. Hedge funds borrow short, lend long, and hope to make money off the spread between the short and long rates, which has become the government’s new business. While this is the first time the government is truly “investing” directly in securities, neither the government nor the media will be calling it that. Even though we are told that every other spending program in this country is an “investment” in our country’s future, TARP does not get the golden title of “investment” that every other entitlement program gets. Instead, it is an ugly “expense” with the taxpayers footing the bill. In actuality, all of the programs are expenses and we foot the bill for every spending program. But expenses are necessary evils, and hopefully the investment in our banking sector will pay off.

10) The need to dodge traffic cones. The government’s new New Deal includes huge infrastructure spending that won't really begin to affect the economy until 2010. But get excited about dodging lots of traffic cones! From bridges to water slides, construction cones will be everywhere. And that is about the only way the new New Deal will affect you until these projects approach completion in 2011 and 2012. But once they are completed, our infrastructure, particularly bridges, will be much more stable.

It is important to remember that we have elected a president, not a king. Congress makes the laws and The President in fact only has two major powers; the ability to veto and send the troops to war. So, the real success of the Administration hinges on the success of the new Congress and the ability to keep special interests at bay when important bills are proposed. Every single one of the ten points above falls outside of the power of the President, and therefore we should be much more watchful of Congress. President Obama has shown an admirable desire for bipartisanship in Congress, and I think we all commend him for that. He appears to truly want the best for America, and I remain hopeful that he and Congress will make the best choices for our ailing economy and for each of you.