Tuesday, July 29, 2014

My Buy Michigan Week Contribution

It’s Buy Michigan Week (July 28th through August 3rd), so I’m making my contribution. I’m a Michigan homeboy: I was born in Detroit, grew up in Hazel Park, went to college and law school in Detroit; spend summers in Eastport, hunt in West Branch and kayak any stretch of open water I can find without too many lake freighters. I’ve viewed Michigan as a state of opportunity, and a state where businesses large and small can thrive. Michiganders are survivors: we survive fierce winters, and fierce recessions.

In 2009, I viewed Michigan as an emerging market. We had two of the big three car companies emerging from bankruptcy, plus a plethora of other horrible news. Our unemployment was way over the national average; our real estate markets were devastated. I started tracking Michigan-based companies just by their market capitalization. And guess what? Michigan not only emerged from the ashes, they outperformed the S&P 500 from March 2009 through December 2013 by 25%.

At the end of 2013, I met with the faculty at Walsh College to discuss the finance lab I’m proud to support. Our discussion led to the concept of an emerging market in Michigan and we agreed it would be very cool for the students to have a portfolio of Michigan stocks. I suggested that real money is better than virtual money, so I put up $100,000 of my funds for the students to invest, and the Michigan Alpha Project (MAP) was born.

A student-run team won the request for proposal process to manage the funds. They created an investment policy statement for my account and I gave them access to invest it. How are they doing? Right now, kind of flat. They picked some nice winners, which were offset by some losers. I own a wide spectrum of stock in Michigan businesses, in everything from cars to furniture to high tech and biotech. But I think the students are winning as well, with real-life examples and real money. Hopefully, some of this talent will stay here in Michigan and help our state continue to grow.

So we can ‘Buy Michigan’ in a lot of ways. You can buy a La-Z-Boy chair or La-Z-Boy stock. You can buy a box of Corn Flakes or Kellogg stock (some of the stocks the MAP team picked in my portfolio). In any event, I celebrate our state. We have good companies, great people and bright students. Seems like a good combination.

Si quaeris peninsulam amoenam circumspice


Wednesday, June 25, 2014

Breakfast Indicator

In the information age of today, there are myriad indicators for the economy ranging from the employment numbers to the men’s underwear indicator. They wouldn’t exist if they didn’t have some merit but none tell the full story. So, why not add one more? I propose the “Breakfast Indicator”, which is currently anecdotal, though testing will commence soon. If fast-food restaurants have lines waiting for breakfast, the economy is improving or doing well. Fast-food companies expanding to offer menus including breakfast clearly see opportunities, implying people are buying more breakfast, furthering the claim.

Why does this indicate a strengthening (strong) economy you may ask? If money is tight, grabbing something on the way to work, while much easier than making something at home, is much more of a luxury. In a weak economy, a commuter wakes up a couple minutes earlier, grabs a bowl of cereal and cup of coffee before heading to work. In a stronger economy, an employee feels more confident with her current level of income and wakes up a bit later, stops for a quick eat-in-the-car breakfast before continuing to work.

Let me pause to address the issues that have arisen in brief conversations about my intuition. First, being awake, and in line, for fast-food breakfast on my way to work is a little early for someone unemployed (and not actively looking for work). In addition to being awake, the cost (relatively small, but still) is greater than someone without income will usually feel comfortable spending. Second, if the population feels better about work, they are more likely to feel comfortable showing up to work less early. Finally, one may ask why breakfast and not lunch? For a couple reasons: most everyone is awake by lunch time; grabbing something quick to head back to the office implies a rush (less comfort in the job); and most importantly, fast-food lunch is cheaper than sit down places.

What does this say about today? Every morning, I see drive thru lines full at Taco Bell, Tim Hortons, Dunkin Donuts, McDonalds and Starbucks in that order on my way to work. To take it one step further, Taco Bell just recently expanded to serving breakfast, citing potential for great growth. From everything I am seeing, the economy looks to be growing. Not all is growing though; I have found the drive-thru lines, coupled with my complete lack of patience has shrunk my waistline.

As always, stay invested.
Michael Baldwin
Research Analyst

Wednesday, April 16, 2014

Fire in the Hole: Lesson Learned

Fire in the Hole: 
Lesson Learned

I dodged a potential big loss last month.  Anne, my wife, and I have a nice house and a very nice kitchen.  Anne is a gourmet chef, so we have really good (and expensive) appliances.  One fateful morning one of our appliances went rogue.  The control panel in the stove shorted out and the stove burst into flames.  Once a month we have cleaning ladies come in and, luckily for us, they were at the house and they're tough.  One hit the circuit breaker and the other called 911 and ran across the street to get my neighbor, who is a firefighter.  The fire was extinguished leaving behind one ruined, expensive stove and some burn marks on the floor.  We just finished the clean up this weekend.

We dodged the bullet, but it got me thinking about a lot of things, such as what if the cleaning ladies hadn't been there, or if we had been sleeping, or so many other possibilities.  Then I realized that I'm a personal finance whiz with some missing ingredients.  Had my house burned down, I did have replacement insurance on the contents, but didn't really have a record of the contents.  I have a whole bunch of pin numbers on my account, but not a way to get those to my wife.  I have insurance, but I haven't shopped it for quite a while.

This was annoying, so I sat down with the programs I wrote years ago and built some useful checklists; simple lists, but things we all should be doing.  We refined it and sampled it with some clients, and got a shocking 100% positive response.  It seems that most of us, no matter how organized we are, want to get our affairs in order and have some peace of mind.  I noticed something else:  I have a scarcity of time, so getting these things done liberates some time and brain space.

What kinds of things are on the checklists?  Well, the first and foremost is to make a visual inventory of the contents of your home.  Use one of your snazzy electronic devices, a camera or video recorder, and make a timely picture record.  Put something in the photos (e.g. Time magazine) that dates the picture.  Store the picture in a safe place.  What about your wallet?  Make a copy of the contents of your wallet (not the money, that's illegal), and have that in a safe place.  Do the same with your pin numbers and account numbers in your digital legacy.

There's more, a lot more.  Have you told your agent on your power of attorney about the POA?  Have you talked to the guardian in your will?  Did you put a guardian in your power of attorney?  Are you using auto-bill pay to speed up your cash flow?  Can you benefit from some kind of account aggregation?  This is where you can look at all of your accounts in one place at one time, like a dashboard.

All in all, we came up with almost 60 ideas of some simple, but important things that you can do.  Of course, not all apply to everyone, but the basic principle is simple:  a good financial life has a lot of pieces that are just common sense things that we should do.

Living without a stove for a couple of months was troublesome:  I can't wait to make some omelets.  On the other hand, I think about what might have happened and respect the wake-up call.  If you want a copy of our checklists, drop me an e-mail ( and I'll send you the pdf version.  I think it's the right thing to do and it will make you and your family's life better.  Oh, and be sure to check the batteries in your smoke alarms as well.


Monday, February 24, 2014

Detroit Bankruptcy Plan: A Lose-Lose for Retirees and a Math Problem

Detroit Bankruptcy Plan:  

A Lose-Lose for Retirees and a Math Problem

On February 21st, the city of Detroit emergency manager, Kevin Orr, presented a plan to U.S. District Court Judge Steven Rhodes to bring Detroit out of bankruptcy. One salient point of the plan is a reduction to the pensions of Detroit retirees. Police and fire retirees are poised for a 10% cut (4% if they accept right away), and general retirees are set to take a 34% reduction. This is on top of a giant increase in retiree health care costs, where the retirees will get a fraction of the amount necessary to keep health care.

It's unfair, and aggravating that retirees take a hit for a situation they didn't cause and a decision they didn't take part in. Bondholders and creditors made conscious decisions to lend money to Detroit, but a pensioner had the presumption that they were to receive a pension that was protected by the state constitution. But that's not all. I don't like the precedent; if you think about it, now the most distressed cities are having their risk increased, and that affects hiring to bonds. I also think that the private sector has at least a safety net of insurance, which apparently a state constitution cannot provide.

But beyond my moral and social objections, there's a potential problem with the math.

You see, pension math and bond math are different. A bond has a specific legal obligation that is written and enforceable. So if I lend the city of Detroit $1,000, they agree to pay me back my money at a maturity date and pay interest in the meantime. The liability is known, and measurable: the city owes me $1,000. In a pension, the city owes an annual obligation to fund the liabilities of the plan. The liabilities of the plan are calculated using a complicated formula. Basically, the liability of a pension plan is calculated based on:
a.       The amount promised the retirees (their monthly pension);
b.       An estimate of how long the plan has to pay it (the mortality 
          assumption), and
c.       The rate of return the plan will make to fund it (the interest rate 
Sound like a lot of moving parts? It is. Now, here's more of the problem. According to the EM, the unfunded liabilities of the pension system total $3.5 billion. In February, when the state of Michigan's team came in, the unfunded liabilities were $650 million. The city's actuary, which represents literally hundreds of municipal pension systems and applies a rigorous set of established actuarial standards, reported Detroit's general fund as 82.8% funded, and the police and fire pension as 99.9% funded.

The EM hired a different actuary, and that actuary recalculated the pension obligation using a different set of assumptions, which they called a, "very rough preliminary guestimate," and then recharacterized the pension obligations bonds (secured bonds to fund the pension) as unsecured bonds outside of the pension (not the normal practice). That new calculation adjusted the assets way down to 32% for the general fund and 50% for the police and fire fund. This put the pensions below the 80% threshold to allow them to be under EM control.

In other words, the liability might be $3.5 billion, or might be $650 million, or might be some other number, or nothing. In addition, the plans pay this liability over the lifetimes of the pensioners, not all at once, or even on a schedule like bonds. During that time frame, the plan's assets make money and retirees pass away. Depending on those factors, we can determine where the liability goes. If the plan makes more on its investments than the assumptions, the liability reduces, or even vanishes.

It reminds me of the quote attributed to Mark Twain: "Figures don't lie, but liars do figure."

Pension math is tricky, and I don't think people's financial lives should be at the stake of a single calculation. The average Detroit general retiree gets a pension of $19,000, which by my standard is very modest, and to cut that by $6,460, plus make them pay all but $125 of their retiree health care is devastating. I guess I can liken this to an appraisal on a house. We get one appraisal, then another one comes in way lower. Do you automatically accept the lower number (in the case of liabilities, the higher number?) To me, I'd like to see a real version of what the unfunded liabilities really are before the people who worked hard for the city get a haircut. Not only that, if the plan's assets are invested right, there may end up being no liability.

Let's prove the figures. The retirees deserve it.

Monday, February 3, 2014

The Michigan Alpha Project: The Ultimate ‘Made in Michigan’

The Michigan Alpha Project:
The Ultimate ‘Made in Michigan’

There’s an unexpected emerging market in North America that has a market capitalization larger than either Indonesia or Thailand, and larger than Ireland and Israel combined. That emerging market is Michigan.

From November 2012 to November 2013, Michigan employment rose at double the rate of U.S. employment growth. Companies headquartered in Michigan have experienced good returns (25.2% annualized versus 20.93% on the S&P 500) since 03/06/2009. Additionally, these Michigan companies represent a diverse number of industries that are now competing across the globe.

This exciting trend and its breadth of opportunity for growth has inspired me.

Beginning this year, in collaboration with Walsh College, I am personally funding a $100,000 student-run investment portfolio that will consist exclusively of companies headquartered in Michigan. This new program is called the Michigan Alpha Project, or “MAP.”

Why would I do this, you ask? First, I want to create a real-life experience for students. In today’s competitive business environment, real-life experiences are a key contributor to real-world success. MAP brings this ideal experience to life.

Here’s how it works. After being presented with a request for proposal, as is the standard in the industry, the student teams, comprised of a dedicated portfolio manager and analysts, presented their investment strategies to me and some of my colleagues at LJPR.

In the first ever competition, which took place as we transitioned from 2013 to 2014, I had a difficult time selecting my “financial firm” from highly qualified teams, composed of Walsh College Investment Club members. But, in the end, I did so. To provide experience to a broader group, while the winning team runs my portfolio, the runner up will be running a “shadow portfolio,” or back-up plan, in case the winning team does not perform as expected.

If that’s not real-world enough, the students will be utilizing my second inspiration for starting the MAP, Walsh College’s state-of-the art finance lab. Established in 2013 and modeled after the trading rooms on Wall Street, this authentic lab has everything students need to accurately assess and make decisions regarding investment transactions.

So, students do their research, present a portfolio thesis to an experienced wealth manager and then manage his money. What better experience can you have?

My second reason for starting the MAP is Michigan, my home. Michigan is a remarkable state with remarkable people. It is a state of cars, technology, beauty and opportunity. It is a state where a machine repairman and a waitress in Hazel Park can raise their son to become an entrepreneur and eventually build a wealth management firm with $626 million in assets under management (as of 12/31/13).

My love of Michigan is the reason I am working to support the education and retention of its best and brightest minds. I don’t want our young talent leaving home for Chicago or New York. I want them here, where they can be great neighbors and make our state better for generations to come. I want to hire the best and brightest and I want the thousands of great companies in Michigan to have access to the best and brightest.

I was a department chair at Walsh College over 30 years ago. While there, I had the privilege of establishing one of the first Master of Science in Finance programs in the country. My dream was to see the finance department become as recognized nationally as the highly acclaimed tax and accounting programs. That dream still lives. I want to see great Walsh CFP® and CFA programs, I want to hire some of those graduates, and I want to help others land fruitful and interesting jobs at businesses throughout Michigan. With Walsh’s proven successes, dedicated faculty and shining students, I see my dream becoming reality.

But journeys begin with a single step. MAP is that step. I hope you’ll join me on the journey.

For more information about the MAP and its students, visit

Si quaeris peninsulam amoenam, circumspice


Monday, January 20, 2014

Our Outlook for 2014

Happy New Year!
Our Outlook for 2014

We would like to thank all our clients and friends of the firm for a terrific year. For now, the economic and political climate looks favorable. We have developed a piece detailing our 2014 Outlook, which is available on the web at In it, you'll find an overview of our perspective on the economic, investment, tax and estate planning issues of the New Year. In general, we are cautiously optimistic, and as the Outlook covers, we are revising our models to reflect what we see as a new phase of the cycle. We have new funds and new ideas to consider.

2013 had a variety of events that we would not have expected, and some we did:

  • Washington operated in the most dysfunctional fashion since 1900 and as a result, the deficit was reduced by over $500 billion.
  • The Sequester did not cause planes to plunge, or cows to give green milk.
  • The budget showdown caused the government to shut down, which caused a variety of problems for folks who didn't need it.
  • The Health Care rollout went poorly, surprising everyone that the government jumping into high technology might have snafus. It is interesting that the contractor, CGI Federal is a Canadian company (French Canadian, zut alors). So we had the US government trying to build a website using a Canadian company to implement an exceedingly complex health care decision to allow people who can't get health insurance to go on a computer and sign up. Now why didn't that work?
  • On the other hand, Kentucky had a tremendously successful health exchange that worked swimmingly. Maybe working on it and testing it for over two years helped.
  • We had a terrorist attack on US soil, not from Al Qaeda, but from two young disgruntled men from Chechnya. Scary, but interesting that the amount of technology that surrounds us is amazing. There were pictures of the perpetrators within hours.
  • Speaking of technology, Target had 40 million customers "targeted", whose credit/debit accounts were compromised from in-store transactions. Stores were then overwhelmed with cash, which baffled clerks who couldn't make change.
  • Detroit filed for bankruptcy, now bringing a huge question of whether a Federal Bankruptcy judge can trump the Michigan Constitution (which I think will go to the Supremes). It also presents a strange argument that the biggest creditor of Detroit is the retirees, and the biggest asset (by the Judge's position) is the retiree's pension.
  • Vladimir Putin demonstrated his vast leadership qualities (?) by helping broker peace accords with Iran and Syria.
  • The North Korean leader, Kim Jong-un, provided a new meaning to the phrase 'termination with extreme prejudice' as it applied to his uncle and all his aides.
  • The Fed began its long-awaited "taper". In July, when the Fed Chair gave an example of tapering, stocks and bonds took a dive. When the taper actually started, the market soared. Go figure.
So, we couldn't make this stuff up, but after all of this, US equities had a banner year. Perhaps we should predict doom and gloom for 2014, but our outlook is actually simple: we expect the economy to continue to grow, the taper will continue, interest rates will likely rise, emerging markets will grow, and the media will be inundated with political campaign ads. 

What about 2014? Here's a foreshadowing of what we expect:
  • As a result of our client survey, we are providing a variety of client enhancements.
  • We have revised our investment models to include some new low-cost funds and to reflect our view on a rising rate environment (more in the Outlook). Expect this early in 2014.
  • Financial planning will have to take into account changes in the health care situation.
  • We will be providing a series of educational programs for clients and friends throughout the year.
  • We will be leveraging technology to do out-of-office meetings (such as Skype).
  • We are engaged in a very exciting project called the Michigan Alpha Project (MAP). The MAP is a collaboration of Walsh College and LJPR to provide a real-time, real money portfolio in one of North America's best markets: Michigan. We will be posting more on this later.

All in all, we see some challenges for 2014, but proper positioning and diligence in planning will provide the opportunity for a solid year. As always, we'll be on the lookout for potential problems as well as opportunities.

We wish you all a very Happy New Year. In closing, we'd like to offer a New Year's wish: Go Green, Go White! For the rest of 2014: may you have a year of good health, happiness and prosperity.


PS: If you get mad at my jab on Canadian software companies, recognize that 'LaBrecque' is French Canadian. I was just trying to name some great French Canadian software companies that I can think of, or any big French Canadian companies, for that matter...

Wednesday, November 6, 2013

The Battle of the Budget

The Battle of the Budget:
Upcoming Fiscal Battles 2013-2014

It seems that the markets and the public have very short memories, with the budget and debt ceiling debacle behind us, having been effectively kicked down the road to January.  However, we have the makings of a Greek three-act drama (the allusion to Greece is intentional, I assure you).  Each act plays out, the first an exposition (establishing the main characters), the second act rising actions (where the protagonists try to resolve the situation), and a climax (where it comes to a head).  Here’s our impending drama and our critique: [Note: C Indicates positive outlook; D indicates negative outlook; Nspeaks for itself].

ACT ONE:  December 13- FY2014 budget blueprint
Synopsis:   A joint committee is tasked with establishing a top-line spending level for fiscal year 2014 by December 13. The current top-line spending level is $967 billion, which some in Congress think is too low, particularly compared to current spending of $986.3 billion. Agreement on an overall level of spending will pave the way for completion of a year-long spending bill. The 2011 Budget Control Act requires sequestration if spending exceeds $967 billion for 2014. FY13 spending was $988 billion. The cuts are set to occur two weeks after the end of the first session of the 113th Congress, so roughly January 15.

Risk: Conference Committee Fails; Sequestration sticks  N
Risk probability: Medium CD
Economic impact associated with the event:  CD
Momentum in the event of occurrence:  CD
Rationale: To avoid sequestration, the $967 billion cap on spending will need to be raised. But, in order to raise spending above the $967 billion cap, negotiators would have to find a mix of spending cuts and tax increases that would be hard for both Democrats and Republicans to swallow. Another option would be to raise the cap for 2014 and lower the cap in future years, easing the short-term impact on the military and non-defense agencies.
What to Watch: Budget Conference Agreement that sets 2014 top-line spending

ACT TWO:  January 15-Short-term funding bill expires
Synopsis:   A short-term debt ceiling bill (H.R. 2775) to fund the government through January 15 requires Congress to pass another spending bill by then to keep the government open.
Risk:  Government Shutdown NN
Risk probability: Low C
Economic impact associated with the event: D
Momentum in the event of occurrence: DD
(depending on term of shutdown)
Rationale:  A January shutdown is not likely because of the political fallout Republicans endured during the October shutdown. The short-term debt ceiling bill required budget conferees to finalize a budget blueprint by December 13. This would establish a top-line spending number for fiscal year 2014 ahead of the January 15 deadline, paving the way for a year-long funding bill and avoiding a government shutdown. If the conferees fail, Congress could pass a continuing resolution through the end of the year.
What to Watch: Budget conference agreement settles this problem.

ACT THREE: February 7-Debt limit suspension expires
Synopsis:  A short-term debt ceiling bill (H.R. 2775) suspends the debt limit through February 7.

Risk: Default on U.S. Government debt NNN
Risk probability: Very Low C
Economic impact associated with the event:  N
Momentum in the event of occurrence:  DDD
Rationale:  Treasury can use extraordinary measures to keep from breaching the debt ceiling after suspension of the limit ends February 7, which likely means Treasury won't need another debt limit boost until at least mid-March 2014. 
What to Watch- Letter from Treasury saying when extraordinary measures will be exhausted.

I’m not thrilled at all about this play.  In fact, I’d like to see it resolved after the first act.  This whole Committee arrangement is exactly what was done in 2011, which got us into sequestration.  Don’t get me wrong about sequestration, its done more to reduce the deficit than our elected official have by acting.  But I’d like to offer the time-honored strategy of compromise.  Go watch films of Tip O’Neil and Ronald Reagan.  The Tip and the Gipp were miles apart, but worked together.  In the meantime, watch the conference committee and December 13.