The House and Senate have reached an agreement on the American Recovery and Reinvestment Act of 2009, better known everywhere as “that huge stimulus bill“. I couldn’t stop myself from taking a peek. Here are some details that directly affect most taxpayers:

“Making Work Pay” Tax Credit: $400 per person, $800 per family
Apparently it won’t be sent out as a lum-sum check this time, but will directly increase your paycheck as an extra $13 a week in take-home pay starting in June (since it is retroactive to 2009), falling to about $8 a week in January 2010. I tend to think a lump-sum would have more “bang”. Starts to phase out at $75,000 modified adjusted gross income for single filers, $150,000 for married filing jointly.

“Not Working” Tax Credit: $250 per person
For retirees, disabled individuals and others who don’t work, they will receive a one-time $250 payment. This will probably be a check in the mail.

$8,000 First-Time Homebuyer Tax Credit
Although there was talk of a $15,000 tax credit for all homebuyers, it looks like it was greatly reduced and still restricted to first-time homebuyers. Starts to phase out at $75,000 modified adjusted gross income for single filers, $150,000 for married filing jointly.

If you bought your house between April 9, 2008 and December 31st, 2008, the first-time homebuyer tax credit remains at $7,500 and you will have to pay it back over 15 years, or when you sell the house. If you bought your house after January 1st, 2009 and before December 1st, 2009, the credit is now increased to $8,000 and you will not have to pay it back as long as your live in it for 3 years.

New Car Tax Deductions
If you buy a new car, you can deduct the interest you pay on your loan as well as the taxes you paid on it (on up to $49,500). Starts to phase out at $125,000 modified adjusted gross income for single filers, $250,000 for married filing jointly.

…and a whole lot more, including expanded unemployment benefits. An example of a tiny tidbit that got mixed in? In 2009 and 2010, you can now use your 529 plan money to pay for “computers and computer technology”, which could include peripherals, software, and even broadband internet fees.

In accordance with yesterday's post, it appears that this February is set to continue the trend of low volatility observed in previous years. With the US government on the verge of passing a record economic stimulus package, investors are becoming increasingly confident about the prospects of the global economy to avoid recession. On the surface, it would seem that the stimulus should benefit the economy, and by extension the Dollar. However, this ignores the fact that the Dollar is currently being driven by fear- the idea that the US remains a safe haven for investing- rather than by economic fundamentals. The same holds true for the Japanese Yen. Accordingly, regardless of how the stimulus ultimately impacts the economy, it will certainly increase risk tolerance in capital markets, potentially leading investors to shift capital out of the US and Japan into higher-yielding sectors. Bloomberg News reports:

"A lot of money that sat on the sideline is now being put back to work," said [one analyst]. "People are starting to move to make risky bets."

Read More: Yen, Dollar Fall as U.S. Stimulus Prospects Reduce Haven Demand

Speculation surrounding the Chinese Yuan has been mounting for months, beginning with a sudden halt to the currency's appreciation and continuing with the insinuation of the Obama administration that China is a currency manipulator. In the context of falling exports and a sagging economy, meanwhile, the Chinese Ministry of Finance has issued a research report encouraging the Central Bank to allow the currency to appreciate. Despite the Central Bank's insistence that it wants a "stable" currency, futures prices indicate a mean expectation that in fact, the Yuan will be nudged downward over the next twelve months. On the other side of the equation are financial analysts, who collectively forecast a slightly stronger Yuan, with one bullish analyst projecting a 3.5% appreciation in 2009, on the basis of selectively culled economic data. Bloomberg News reports:

“The consensus around China has been weak growth and falling reserves. The recent data challenges both views. Lending looks good, money supply looks good, and the PMI balanced to slightly bad from very bad levels.”

Read More: Citigroup Is Bullish on Yuan, Bets for 6.60 Year-End

Convention forex wisdom, as well as the "immutable" laws of economics, have long held that higher interest rates correspond with currency appreciation. This has been especially true in recent years, as risk-hungry investors used low-yielding currencies to fund carry trades, the proceeds of which were invested in higher-yielding alternatives. In the context of the credit crisis, however, this logic has been turned on its head, as the countries with the lowest interest rates have seen their currencies outperform. Emerging market economies that have turned bearish on inflation have likewise been rewarded with strong currencies, despite a potential imbalance in the risk/reward profile. This phenomenon suggests that investors are primarily concerned with deflation, and are parking their money in the countries they believe can best preserve their capital, even if the real rate of return is negative. One analyst argues this could spur further interest in gold, reports SeekingAlpha:

If it [the Euro] also joins the zero interest band-wagon then one may wonder what’s left for the currency markets to play with? Is this is a precursor to a crisis brewing here? Does gold get a further leg up – it’s a zero yield currency anyway!

Read More: The Currency Conundrum: Is It Another Leg Up for Gold?

At its next meeting, to be held in March, the European Central Bank is all but certain to bow to pressure and cut its benchmark interest rate to a record low. This should not come as a surprise, for the ECB’s February decision to hold rates constant was met with a large outcry, in both public and private circles. Soon-to-be-released inflation data is expected to confirm that prices are rising at a slower pace, perhaps even below the ECB’s 2% benchmark. Members of the Bank are also paying attention to the Euro, the continued weakness of which is ironically a product of the ECB’s comparatively tight monetary policy, as investors guard themselves against the risk of deflation. The Guardian reports:

As the economy falters, speculation is also increasing that the ECB may expand its monetary toolbox, possibly through asset purchases, to boost growth while keeping rates relatively high compared to other central banks.

Read More: ECB’s Liikanen, Bini Smaghi say rates could move in March

After months of speculation, it appears that forex markets have finally concluded that the Central Bank of Japan is now prepared to bring down the Yen. On the one hand, the Finance Minister of Japan very publicly denied that the overvalued Yen and the consequent need for forex intervention was discussed during either his personal conversation with US Treasury Secretary Geithner or at the most recent G7 conference. At the same time, he pledged the willingness of Japan to fight “excessive swings” in forex and capital markets. Meanwhile, the expensive Japanese Yen has already trickled down to the economy, driving a 12.7% decline in GDP (in annualized terms) for the most recent quarter. The Yen, accordingly, has begun its retreat, already erasing nearly 10% of the gains it racked up against the Dollar over the last year. Reuters reports:

Read More:Â Japan to act vs FX swings

While China remains committed, in rhetoric at least, to a flexible Chinese Yuan that rises and falls in accordance with market forces, its actions suggest otherwise. Beginning in the second half of 2008, China stopped allowing the Yuan to appreciate, for fear that a more expensive currency would exacerbate the domestic effects of the credit crisis by making exports less competitive. What China fails to realize however, is that a more valuable Yuan is not only conducive to global economic stability, but also to its own economic well-being. In fact, the artificially cheap Yuan may have actually worsened the economic downturn in China, because de-incentivized the creation of a domestic economic base. Now that overseas demand has dried up, it is left feeling the consequences of this neglect. The San Francisco Chronicle reports:

Read More: Undervalued currency helps, hurts U.S. economy

An overview of the Dow Jones Industrial Average

Most investors that I speak with are very aware of the Dow Jones Industrial Average. After all, you can’t turn on the tv nowadays without seeing the familiar gyrations of the index listed somewhere on the screen. However, many do not have further insight into the Dow Jones Average, and more importantly, how it works. I have put together a brief explanation, along with a list of the DJIA companies currently included..

The Dow Jones Industrial Average index - (DJIA)

Sponsored by:

Is a price-weighted average of 30 actively traded blue chip stocks, primarily industrials but including American Express Co. and American Telephone and Telegraph Co. Prepared and published by Dow Jones & Co., it is the oldest and most widely quoted of all the market indicators.

The components, which change from time to time, represent between 15% and 20% of the market value of NYSE stocks. The DJIA is calculated by adding the closing prices of the component stocks and using a divisor that is adjusted for splits and stock dividends equal to 10% or more of the market value of an issue as well as substitutions and mergers. The average is quoted in points, not in dollars.

Companies included in the DJIA

The Dow Jones Industrial Average consists of the following 30 companies:

3M Co. (MMM)
Alcoa Inc. (AA)
American Express Co. (AXP)
AT&T (T)
Bank of America (BAC)
Boeing Co. (BA)
Caterpillar Inc. (CAT)
Chevron (CVX)
Citigroup Inc. (C)
Coca-Cola Co. (KO)
Walt Disney Co. (DIS)
DuPont (DD)
Exxon Mobil Corp. (XOM)
General Electric Co. (GE)
General Motors Corp. (GM)
Hewlett-Packard Co. (HPQ)
Home Depot Inc. (HD)
Honeywell International Inc. (HON)
Intel Corp. (INTC)
International Business Machines Corp. (IBM)
Johnson & Johnson (JNJ)
JPMorgan Chase & Co. (JPM)
Kraft Foods (KFT)
McDonald’s Corp. (MCD)
Merck & Co. Inc. (MRK )
Microsoft Corp. (MSFT)
Pfizer Inc. (PFE)
Procter & Gamble Co. (PG)
United Technologies Corp. (UTX)
Verizon Communications Inc. (VZ)
Wal-Mart Stores Inc. (WMT)

Dow Jones Industrial Average Critics

With the current inclusion of only 30 stocks, critics argue that the DJIA is not a very accurate representation of the overall market performance even though it is the most cited and most widely recognized of the stock market indices.

Additionally, the DJIA is criticized for being a price-weighted average, which gives relatively higher-priced stocks more influence over the average than their lower-priced counterparts, but takes no account of the relative size or market capitalization of the components. For example, a $1 increase in a lower-priced stock can be negated by a $1 decrease in a much higher-priced stock, even though the first stock experienced a larger percentage change.

In addition, a $1 move in the smallest component of the DJIA has the same effect as a $1 move in the largest component of the index. As of February 2009, IBM is the highest priced stock in the index and therefore has the greatest influence on it. Many critics of the DJIA recommend the float-adjusted market-value weighted S&P 500 or the Dow Jones Wilshire 5000, the latter of which includes all U.S. securities with readily available prices, as better indicators of the U.S. market.

Hopefully this answers some questions that you may have about the Dow Jones Industrial Average, its components, and how it works.

New Obama Housing Plan attempts to stem Foreclosures

Article body contributed by Reuters, read original here

President Obama unveiled his much-anticipated housing plan Wednesday to fight the real estate crisis, pledging up to $275 billion to help stem a wave of foreclosures sweeping the country.

“All of us are paying a price for this home mortgage crisis. And all of us will pay an even steeper price if we allow this crisis to deepen—a crisis which is unraveling homeownership, the middle class, and the American Dream itself,” Obama said in prepared remarks released on Wednesday about his housing plan.

Obama, who on Tuesday signed a landmark $787 billion economic stimulus bill aimed at jolting the U.S. economy out of recession, was to formally unveil his housing plan at 12:15 p.m. EST in Mesa, Ariz.

The housing crisis has played a central role in the financial and credit turmoil now spread across the globe, with many homeowners saddled with mortgages they cannot pay.

At the end of last year, just over 9 percent of all home loans in the United States were in arrears or already in foreclosure, the Mortgage Bankers Association has said.

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Read Obama’s speech on his $275 Billion Housing Plan

A total of 8.1 million U.S. homes, or 16 percent of all households with mortgages, could fall into foreclosure by 2012, according to a report by Credit Suisse.

An Obama administration official said the total plan commits up to $275 billion for housing, including $50 billion from funds already committed in the country’s financial sector bailout. It aims to help up to 9 million American families under the housing plan.

Home Buyers Kicking Tires?

Mindful of critics who might charge that the scheme would help people who just took on far more debt than they could afford, Obama said his housing plan was aimed at “rescuing families who have played by the rules and acted responsibly,” refinancing traditional mortgages for up 5 million homeowners who now are close to owing more than their homes are worth.

It will also establish a $75 billion fund to reduce monthly payments for another 3 million to 4 million homeowners “stuck in sub-prime mortgages they can’t afford as a result of skyrocketing interest rates or personal misfortune,” Obama said.

The Obama administration’s summary of the housing plan said the plan could offer a buffer of up to $6,000 against value declines on the average home.

This one hits close to home as the Stanford Financial Group is located in Houston.

The SEC has registered a complaint against Stanford Financial Group (StanfordFinancial.com), alleging massive fraud. You can read the PDF of the complaint here. If the SEC’s complaint is to be believed, Stanford Financial Group is evil. Read the complaint for yourself.

The complaint is filled with lots of accusations. I found this one from the SEC’s press release interesting:

According to the SEC’s complaint, the defendants have misrepresented to CD purchasers that their deposits are safe, falsely claiming that the bank re-invests client funds primarily in “liquid” financial instruments (the portfolio); monitors the portfolio through a team of 20-plus analysts; and is subject to yearly audits by Antiguan regulators. Recently, as the market absorbed the news of Bernard Madoff’s massive Ponzi scheme, SIB attempted to calm its own investors by falsely claiming the bank has no “direct or indirect” exposure to the Madoff scheme.

The SEC seems to be overreacting to the Madoff tie. When I dug into the complaint, I found exposure of $400,000. From the complaint:

In a December 2008 Monthly Report, the bank told investors that their money was safe because SID “had no direct or indirect exposure to any of [Bernard] Madoffs investments.” But, contrary to this statement, at least $400,000 in Tier 2 was invested in Meridian, a New York-based hedge fund that used Tremont Partners as its asset manager. Tremont invested approximately 6-8% of the SIB assets they indirectly managed with Madoffs investment firm.

Yes, it is exposure to Madoff, but it is relatively small exposure for a company managing billions of dollars.

I did find something kind of interesting while looking around on Stanford Group’s website. For instance, here is some information on their investment strategy. It sounds eerily similar to Madoff’s “strategy.”

Stanford’s Stanford Investment Model (SIM):

The objective of the Stanford Investment Model (SIM) is to provide consistent returns regardless of market volatility, and it is based on the investment philosophy that has been used successfully for all of Stanford’s proprietary funds. We target a consistent yield or income stream as agreed upon with our clients, while monitoring risk and managing the overall volatility of the portfolio.

Our strategy for diversification to minimize the effects of market volatility is sophisticated and far-reaching. We pursue true global diversification with relentless intensity to meet our objective of targeted returns. We carefully consider asset classes, investment strategies, sectors, and regions of the world that most investors either don’t have easy access to or rarely receive information about. SIM was developed first and foremost to minimize the downside risk of a portfolio.

We recognize taking risk is essential to achieve investor goals, but there is a difference between accepting the risk the market gives you and managing that risk.

Although we may not outperform the indices during a bull cycle, our investment strategy is one of long-term consistency through bull and bear markets. The Stanford Investment Model offers investors a truly different view of wealth management.

This stuff is getting more exciting by the day. The best fiction writers would have a hard time coming up with stuff this good.