Public Higher Education - Shifting the Cost to Students

Update to Tuesday, February 16, 2010 Post: The Erosion of Quality and Value in the PA State System for Higher Education

Trend #1
The Erosion of Value: The Hidden Shift in the Cost of Attending a State System University in PA

http://www.dismalscientists.com/2010/02/data-suggest-that-legislative.html

UPDATE: Chronic Unemployment

by Ben Atwater and Matt Malick

If you have seen the nightly news in the last four years, you are undoubtedly aware of the unemployment problem in the United States.  Creating jobs has been a centerpiece of both presidential campaigns as the U.S. suffers from an unemployment rate that refuses to fall to normal recovery levels.

The last American recession that was comparable in severity to the Great Recession of 2007 - 2009 occurred in the early 1980s.  Following a spike in oil prices in the late 1970s, coupled with high interest rates that the Federal Reserve instituted to fight inflation, the U.S. economy experienced an acute downturn that lasted from July of 1981 through November of 1982 (16 months).  During this recession, the unemployment rate exceeded 10% for the first time since the 1930s.  In fact, the unemployment rate did not surpass 10% again until 2009.  The Great Recession, by comparison, lasted from December of 2007 until June of 2009 (18 months) and saw a more severe decline in economic activity.

But during the ensuing recovery in the early ‘80s, the unemployment rate fell fairly quickly.  The chart below compares the trend in the unemployment rate in the months following the end of each recession.



The stubbornly high unemployment rate in the current recovery has led many to suspect that we are dealing with structural unemployment rather than merely cyclical unemployment.  In other words, there is a greater percentage of the population that, for a variety of reasons, is likely to remain unemployed for the foreseeable future.

Interestingly, concurrent with high unemployment, we have seen a surge in job openings among American businesses.  The chart below indicates that job openings bottomed in mid-2009 (around the end of the recession) and began a steady uptrend that leaves us with over 3.66 million unfilled job openings today.



Companies may not be hiring more aggressively simply because they cannot find qualified and willing candidates.  If we could match unemployed workers with current job openings, we would theoretically lower the unemployment rate by about 2.4% - from 8.1% as of August 2012 to a fairly benign 5.7% level.

Digging deeper into the demographics of the jobless would seem to confirm that structural unemployment is a serious problem.  The chart below illustrates August 2012 unemployment rates based on education levels.



There is a positive and a negative take-away from this data.  First, it indicates that unemployed workers may be losing their skills and motivation to work.  But second, it also implies that “uncertainty” is not crippling the economy to the degree that we have been led to believe.

Where Are We?

By Matt Malick and Ben Atwater

There has been an increase in web chatter, television series, movies, books and news reports about various cosmic disaster scenarios including asteroids, solar flares and black holes. David Morrison, the senior scientist at NASA’s Ames Research Center in California and a Harvard PhD in astronomy, recently asked, “Why is our society so focused on potential disasters?”

Dr. Morrison’s question is applicable to not just astronomy, but also the pervasive negativity around virtually everything from politics to economics.

And it is no wonder. Using the U.S. stock market as a barometer of mood, it is at the same depressingly stagnant level as it was a year ago (spring 2011) . . . and fourteen years ago (summer 1998).

Not just that, but during the decade of the 2000s, investors experienced not one, but two drops of about 50% in the U.S. stock market. And after making major progress in 2009, the market has struggled with 20% declines beginning in the springs of 2010 and 2011. Although it rebounded convincingly each time, we are now mired in yet another slump.

After all this, you might assume that nobody would invest in stocks. This is partially correct. Beginning in 2007 and accelerating to this minute, investors have moved over $1.4 trillion from stock funds to bond funds.

Outside of mutual funds, institutional investors are also fleeing equities. Take the massive German insurer Allianz as a prime example. Today its portfolio is 6% stocks, whereas ten years ago it was 20% equities. Given the legal constraints that insurance companies must follow within their portfolios, 20% was a highly aggressive stock position, likely pushing regulatory limits. So at the worst possible time, Allianz had its maximum equity exposure. Now, a decade later, its stock exposure is muted.

This is also true of pension funds, many of which are substantially underfunded. A decade ago, U.S. public pension pools allocated about 70% of their assets to equities, now they have scaled that back to 54%. Not knowing the future, but with an eye toward the past, this is seemingly backward.

To paraphrase Warren Buffett, people tend to invest through the rearview mirror, which he reckons is about as advisable as driving in the same manner.

Chris Puplava, who operates the blog Financial Sense and is a Portfolio Manager with PFS Group in San Diego, CA, elaborates on Buffett’s sentiments:

“What investors must remember is that secular bull market tops are formed at a time when everything couldn’t be better or life brighter. This was the backdrop of the 1929 secular bull market top in which the U.S. industrial giant was firing on all cylinders; or the 1969 secular bull market top in which nothing seemed impossible as the U.S. put the first man on the moon; or the 2000 secular bull market top when we entered a supposed new era of technology and permanent growth. Conversely, when things look like they couldn’t get any worse and that the whole world is going to end, new secular bull markets begin to form.

Right now seems to - once again - fit the description of ultimate pessimism. According to Barron’s, “the 10-year trailing annualized return (excluding dividends) has risen from below zero to a bit over 2%,” a depressing statistic in and of itself. But, what does that potentially tell us about the future?

Barron’s further reports that, “if the S&P 500 is at today’s level on October 9, the tenth anniversary of the 2002 bear-market low, the ten-year trailing return would be 5.5%. That’s similar to post-bear periods in the late ‘40s and late ‘70s – decent times to lay patient bets on equities, but not the start of bull-market manias.” The point Barron’s makes is well illustrated in the below chart from Blackhorse Analytics.


 
Reversion to the mean would indicate that returns will trend substantially higher over the next decade.  But we are hardly suggesting smooth sailing. Instead, we believe that the market will eventually reward patience. You cannot predict the exact day when stocks will begin their next prolonged boom – it is impossible. But you can though invest while the seas are still rough, knowing that if history is any guide, clear skies will return.

So, where are we?

We do not pretend to know what will happen next week, next month or even next year. However, from a long-term perspective, we are likely closer to the end of the market’s doldrums than we are to its beginning.

Thank You Dr. Thaler!

 Economic View

Slippery-Slope Logic, Applied to Health Care

By RICHARD H. THALER

Published: May 12, 2012

The court debate over the new health care law offers yet another example of worrying about imaginary risks.

http://www.nytimes.com/2012/05/13/business/economy/slippery-slope-logic-vs-health-care-law-economic-view.html?smid=pl-share

Interest in Dividends

by Matt Malick

“Do you know the only thing that gives me pleasure?  It's to see my dividends coming in.” - John D. Rockefeller

In the world of investments, everything is cyclical.  Hot trends inevitably cool off and passé ideas return to popularity.  Today, stock dividends have become the latest investment theme to regain favor.

As the last secular bull market was surging in the late 1990s, dividends became a mere afterthought and many analysts even condemned them.  Equities were easily achieving double-digit total returns year after year, making dividends seem relatively insignificant.  Furthermore, many market professionals suggested that corporations were better served using cash to fund acquisitions and other growth opportunities, a sign of rampant optimism.  The logic was that companies had superior internal investment opportunities and to return money to shareholders in the form of a cash dividend was actually a waste.  It was the era of the celebrity CEO who could make no bad decisions.

The next twelve years, however, were an entirely different story.  Equities entered a “lost decade” of relatively flat returns with the S&P 500 at roughly the same level where it peaked in 2000.  And instead of the public considering CEOs to be celebrated allocators of capital, they have gradually become bemoaned fat cats.

Ironically, since 2000, a point in time when dividends were largely ignored, virtually the only return that buy-and-hold equity investors reaped were from dividends.  This “reversion to the mean” phenomenon is not unusual, but always unexpected.

Today, dividends are experiencing renewed appeal throughout the investment community.  In aggregate, U.S. equity mutual funds suffered $103 billion in redemptions in the 12 months ended January 31, 2012, according to Morningstar.  But, nervous investors did not shun dividend stocks.  Just last year, mutual funds that focus on dividends attracted $3 billion in inflows and dividend-themed exchange traded funds took in another $14.3 billion.  There is often an inverse relationship between mutual fund flows and future performance – positive flows can predict underperformance, while negative flows can suggest outperformance.

Investment companies have identified the opportunity to appeal to yield-starved investors, launching 16 brand new dividend-oriented funds in 2011.  Even the Fidelity Equity Income Fund II, which appointed a new manager and increased its exposure to dividend-paying stocks, changed its name to the Fidelity Equity Dividend Income Fund.

Perhaps an interesting sign of the general hunger for dividends is the March 2012 cover of Investment Advisor magazine with its headline, “Dividends, Dividends, Dividends!”.  The assumption among the punditry is that - given below-trend economic growth and, at the same time, strong corporate balance sheets - future returns favor companies that return cash to shareholders.

Despite general enthusiasm, sometimes a contradictory sign, there is actually very sound logic behind dividend stocks.  According to Morningstar, “Since 1927, high-dividend-paying stocks have returned 11% per year, beating the 8% return from nonpayers and resulting in an ending wealth that is 8 times larger.  Better yet, they accomplished this feat while incurring less volatility.”

Furthermore, Ned Davis Research finds that between 1972 and 2005, S&P 500 stocks that had consistently grown their dividends outperformed the nonpayers by 6%.  And presently, the dividend payout ratio (the amount that a corporation distributes in dividends relative to its earnings) is at a historic low of 32 percent.  In the past, the average payout ratio has been over 50 percent.  This statistic implies that companies have plenty of room to raise their dividends in the years ahead.

Moreover, the tax rate on qualified dividend income – currently 15% for most taxpayers – is at an all-time low.

Finally, bond yields have become so paltry that dividends are an increasingly important source of income.  As of today, the yield on the ten-year Treasury stands at 1.97% whereas the dividend yield on the S&P 500 is 1.93% and offers the potential for price appreciation.

Yet, after turning in stellar performance relative to other equities in 2011, dividend stocks have not fared as well through the first two months of 2012.  According to Bespoke Investment Group, the  stocks in the S&P 500 that pay no dividend have outperformed the 50 stocks in the index with the highest dividends by a whopping 12.03%.

In our opinion, dividend-paying stocks serve an important role in a diversified portfolio.  In fact, our managed equity portfolio has a considerably higher average yield than the overall market.  But dividends are not a cure-all for apprehensive investors.  The consensus seems to be that dividend stocks are sure to hold their value, continue paying healthy yields and offer potential capital gains.

We urge caution that dividend-payers are still equities and carry the risk of loss.  And stock dividends are not guaranteed – just ask shareholders in most financial companies during the crisis years of 2007-2009.

Of equal importance, if the market performs well over the next several years, which is our expectation, investors will eventually take notice and start chasing returns.  Dividend stocks could easily trail the overall market if sentiment improves.  This is an important reason to hold a mix of equities in different businesses and with varying market capitalizations, geographic footprints and dividend levels.

The bull market that began in March of 2009 is now the ninth longest bull market since 1928, but the retail investor has still not returned.  For now, dividend paying stocks are the investor’s training wheels to get back into the market.  But if stocks have a big year of gains, greed can take over and folks may think they are riding in the Tour de France and toss the training wheels.