First Quarter 2011 Investment Commentary from South Shore Capital Advisors Cohasset

Provided below is the first quarter 2011 quartlerly investment comments from the South Shore Capital Advisors Cohasset Office. Since this piece was written in early April, there have been more positive data released relative to corporate performance in the U.S. Standard & Poor's pointed out recently that q1 2011 was the first quarter since q1 2006 where S&P 500 companies reported sales growth greather than +10% versus the prior year. The percentage of companies delivering positive surprise relative to expectations for earnings and sales growth also remains very favorable.

Investing Climate

Had I known in advance that the 1st quarter of 2011 would see the price of oil rise 17%, the price of gasoline at the pump rise from $2.82 to $3.85,[1] and the 10 Year Treasury bond yield rise from 3.30% to 3.47%, I would have reduced stock holdings and prepared for a pullback in the market. Had someone told me that there would be a major earthquake in Japan that would cut 0.5%[2] from Japanese GDP forecasts, and major political and social turmoil in northern Africa; I might have sold even more stock. Lacking such “good” information we purchased more stock for clients early in the quarter, and raised equity weightings, a move that turned out just fine given the S&P 500’s 5.42% advance.

Last quarter reminded us that it is hard to make accurate predictions, and harder still to make winning investment decisions based on such predictions. That is why we focus on fundamentals. We like stocks of companies with strong balance sheets and attractive levels of free cash flow. In the realm of bonds we look for individual issues or funds that offer an attractive real return and acceptable risk.

At the end of last quarter, I pointed out that stocks were still a good deal, particularly in relation to bonds, and were likely to be the better bet for price appreciation. I still feel that way. With Standard & Poor’s estimating 2011 earnings of $96.64[3], and an index close of 1324 on 4/11/11, the valuation of the S&P 500 remains reasonable at 13.7x earnings particularly given low inflation and interest rates.

Corporate performance remains strong as companies continue to beat earnings expectations amidst this unprecedented earnings recovery. According to Bloomberg, by mid summer 2011, profits will have recovered their entire 92% decline in 50 months. This compares to the 19 years it took for profits to recover from their 67% drop during the Great Depression.[4]

Extremely low real interest rates are a notable aspect of the current environment. Central banks have engineered this by keeping their policy rates low to stimulate economic activity. Just how low are they?

Right now there are only 5 countries in the G20 where a holder of the currency can make a cash return greater than the level of inflation. This was a key factor in our decision to purchase one year Australian Government bonds in mid February funding that with a sale of US Treasury Inflation Protected Securities that offer near record low real yields of -0.1% for a 5 year bond.[5] Those one year Aussie Bonds give us an almost 2% premium versus Australian inflation and very limited risk of principal loss from rising interest rates

Another purchase last quarter was the stock of Renaissance RE (RNR). A Bermuda based reinsurance company that is a traditionally profitable underwriter with a stock that was trading near book value. The company is engaged in a large effort to return capital to its shareholders through stock repurchases. From a starting point of January 1, 2010, it is likely that shareholders will see them return over 20% of their current $4.5 billion market capitalization through stock purchases. At the beginning of the year, the underwriting environment for property and catastrophe reinsurance was uncertain, but we bought the stock based on its valuation and the fact that the business generates a lot of cash that they are returning to shareholders. Since then, the market for P&C reinsurance has tightened because of the losses from the earthquake and tsunami in Japan. RNR will likely experience manageable losses from this, but will be able to charge higher premiums on new business as industry capital conditions tighten. In future quarters investment income RNR earns on its substantial cash balances should increase as real interest rates rise.

Worth mentioning here is AT&T, a stock that has been in portfolios for a long time. What drew us to AT&T was its dominant industry position in telecom, accompanied by a strong free cash flow yield of 10%, and a consistently growing wireless business. It has been a cheap stock for a long time because its wireline telephone business is in perpetual decline. What made it attractive were a growing wireless business and an affluent subscriber base who love their Iphones. In March, AT&T announced the purchase of T Mobile from Deutsche Telecom – the deal will transform the company from a 50/50 wireless/wireline TelCo to a truly wireless-first carrier that receives 80% of its revenue from wireless and wireless data. Spectrum acquired from T-Mobile will position the company for long term revenue growth and cost savings from the deal will fund faster future earnings growth.[6]

Looking ahead, many folks are inclined to worry about what impact the end of the Federal Reserve Quantitative Easing 2 program will have. I am among this group. But as pointed out earlier in the letter, departing from a focus on fundamentals may not be productive. Therefore, over the coming months I expect to continue to monitor the business performance of our current holdings while watching for new opportunities and keeping duration short in the bond portfolio because I do want to be prepared for rising interest rates.

Please feel free call me if you have any questions.

Sincerely,

Taylor Thomas
Principal


[1] Federal Reserve Bank of Dallas, Quarterly Energy Update, 1Q 2011
[2] Credit Suisse Japanese GDP Growth Forecast, 4/7/2011
[3] Standard and Poor’s Estimate
[4] Bloomberg, Rita Nazareth and Michael Patterson, April 4th, 2011
[5] Us Treasury.Gov Daily Treasury Real Yield Curve Rates for 4/12/11
[6] Sanford Bernstein Research





As of 5/19/2011 South Shore Capital Advisors clients and its employees are holders of Rennaissance Reinsurance and AT&T. This content is provided for information purposes only and is not intended as research. Investing involves the risk of loss. South Shore Capital Advisors is a boutique registered investment advisory firm with offices in Cohasset MA, and Newport, R.I. For more information about South Shore Capital Advisors go to the link "About South Shore Capital Advisors" at the top of this page.

4th Quarter 2010 Quarterly Letter to Clients of South Shore Capital Advisors Cohasset

Provided below is the main body of the 4th Quarter 2010 Quarterly Letter recently mailed to clients of South Shore Capital Advisors' Cohasset office.

Investing Climate:

A generally improving business environment, and growth-friendly news out of Washington during the 4th quarter allowed investors to feel more comfortable putting money to work in the stock market, and less willing to accept the “return free risk” of sub 3% bond yields. Throughout the quarter with each passing week, buying stocks was rewarded with more good news about economic growth here at home.

The big developments in Washington during the 4th quarter were:

1. Quantitative Easing II: The renewed and expanded initiatives undertaken by the Federal Reserve to purchase government bonds that will see them purchase $600 billion in treasury bonds in the open market between November, 2010 and June, 2011.

2. Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010: The aggressive fiscal stimulus measures passed by Congress through its extension of the Bush Era tax cuts for two more years, the extension of unemployment benefits, and the reduction in payroll taxes from 6.2% to 4.2% for 2011.

The move to cut payroll taxes by 2% was unexpected, and it will be a shot in the arm for the 2011 economy. The Congressional Joint Committee on Taxation estimates that this will save Americans $111.7 billion for the year - roughly $370 for each of our 300 million people. The employed will experience the direct benefit of this. For that 90% of the 154 million U.S. workforce, the benefit will be about $800 apiece.

Human nature is such that when a stock or bond goes up in price people want to own more of it even though it is now more expensive. Nowhere during the past few years has this been more on display than the bond market. According to a recent article in Fortune, since the depth of the 2008 financial crisis in September 2008, a total of $937 billion has poured into bond funds – increasing the total investment in those funds by 55% and dwarfing the $195 billion that has flowed into stock funds over the same period. (“The Danger In Bonds”, Fortune, Dec. 27, 2010 p. 108) In my view bonds have become less attractive investments over this time, particularly bonds with longer durations that have prices more sensitive to changes in interest rates. I have reduced the duration of client bond portfolios and I am proceeding cautiously with allocations to that asset class.

When I look at client portfolios, I am heartened by the fact that stocks, which are the majority of most of our client assets, are still a good deal. Even after the market rise of over 80% from the lows in March 2009, there are still high quality companies with strong balance sheets, excellent free cash flow, and rising dividends that can be purchased at attractive prices. On current 2011 earnings projections of $94.80, the S&P 500 is trading at a 13.5 multiple. This equates to an earnings yield (earnings/price) of 7.4% versus a 10 year U.S. treasury yield that is right now around 3.4%. As a broad statement, this gap between the earnings yield and the bond yield makes stocks the better bet for price appreciation during 2011.

In addition to good value, business performance supports the case for owning stocks, as many companies continue to deliver earnings that are better than forecast, and estimates for next year’s earnings continue to rise. According to Standard & Poor’s, for the 3rd quarter 2010, 326 of the 500 companies in the index delivered stronger than expected earnings and analysts continue to raise their earnings forecasts for 2011.

Portfolio Comments:

Recently, two companies were added to your portfolio - Becton Dickinson and Canadian Oil Sands Limited.

Becton Dickinson (BDX) is a maker of hypodermic needles, syringes and test equipment for doctors. Over the past several years Becton had paid down its debt to a point where it was virtually debt free. It is a dominant player in its business and its products are non-discretionary purchases. In October, they decided to take advantage of low interest rates by borrowing $1 billion that they will use to repurchase their own inexpensive stock. They borrowed this money for 30 years at 5%. Over the next 12 months I expect them to buy $1.5 billion dollars worth of their own shares. If the company purchased all the stock at today’s $83 price, we shareholders would get an 8% raise even if their earnings do not grow at all. If next year is like any of the last 10 years, they will grow their operating income too, so earnings per share should grow more than 10%.

Canadian Oil Sands Limited (COSWF) is an energy company that generates substantial and growing cash flow as long as the price of oil remains high. The business’s asset is a 37% ownership of the Canadian Oil Sands joint venture known as Syncrude. Through this ownership, Canadian Oil Sands Limited controls between 40 and 80 years of crude oil reserves. It is costly to produce oil from oil sands, but becomes rapidly more profitable as the price of oil rises. At $80 oil, management has said that they expect to generate $2.35 per share in cash flow this year. At today’s $90 oil they will earn closer to $3.00 per share in cash flow. Its cash flows will be more volatile than those of Becton Dickinson, but an investment in oil is an investment in long term global growth. Global energy demand is expected to increase by 30% between now and 2020 with the lion’s share coming from faster growing developing economies. With a $13 billion enterprise value, the company trades at a substantial discount to what the Chinese entity Sinopec paid for Conoco Philips’ stake in Syncrude this past summer. A buyer paying Sinopec’s price of $515 million for each 1% of Syncrude would need to pay approximately $18 billion for Canadian Oil Sands shares or about 50% more than where the stock trades today. Speculating on a sale of the business is all “pie in the sky,” but since Canadian Oil Sands Limited is no longer a Canadian Income Trust as of December 31st, foreign holders can own more than 50% of the business leaving the door open for this.

Between now end the end of the 1st quarter, you will most likely receive another mailing from South Shore Capital Advisors that contains our revised SEC Form ADV Part II. The new financial regulations require us to revise these documents so that they are written in “plain English.” Our lawyers wrote the last ADV part II before that law was in place, and it could use a little editing in my opinion.

Please give me a call if you have any questions about your portfolio or if there have been any changes to your circumstances that warrant a fresh look at your investment strategy.

Sincerely,

Taylor Thomas


As of 1/25/2011 South Shore Capital Advisors clients and its employees are holders of Becton Dickinson and Canadian Oil Sands Limited. This content is provided for information purposes only and is not intended as research. Investing involves the risk of loss. South Shore Capital Advisors is a boutique registered investment advisory firm with offices in Cohasset MA, and Newport, R.I. For more information about South Shore Capital Advisors go to the link "About South Shore Capital Advisors" at the top of this page.

Emotional Intelligence Helps Make a Good Investor

Robert Shiller is the Arthur M. Okun professor of economics at Yale University and author of the books Irrational Exuberance (2000) and Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism (co-author 2009). He is generally regarded as having predicted the Tech Bubble and the Housing Crisis.

In a recent interview that appeared in the May/June issue of REIT Magazine he made the following observation:

It is certainly plausible that the best investors have always succeeded because they excel in emotional intelligence.

They listen better, so they understand motivations better. They form relationships better, so they learn things about the world that other's don't and also who to trust. They're a better judge of genuineness and can see through the artifice in investment presentations that may draw others into poor propositions. In that sense, emotional intelligence is highly relevant to sound investment strategy.

Secret Millionaires

In an environment like Today’s where the stock market has virtually treaded water for the past 10 years, we do not hear the stories about Secret Millionaires the way we did in the Nineties.

Secret Millionaires are those people that amass fortunes well beyond what might have been expected based on their incomes, and keep it quiet. Because they keep it quiet, few people know about their riches until after they pass. Even then publicity generally comes when they leave the money to charitable institutions that share the good news of the gift with the public. The following are four stories about secret millionaires.


Raymond Fay

Raymond Fay lived a modest life in Philadelphia. He died at the age of 92 in December, 1995. Never earning more than $11,400 a year, he retired as a high school chemistry teacher in 1969. He spent the next 26 years reading books -- nearly 16,000 of them, and catalogued them neatly on 3x5 cards he kept in shoe boxes. At his death he left the Free Library of Philadelphia $1.5 million which he had accumulated in municipal bonds.[1]

Donald and Mildred Othmer

Donald Othmer was a picture of industry, frugality, intellect and charity. Othmer was a professor of chemical engineering at Polytechnic University in Brooklyn, NY. Donald died in 1995 and his wife Mildred passed away in 1997. They left hundreds of millions to their favorite charities. How did they do it?

Don’t be disappointed to learn that they invested with Warren Buffett. Frugality and industry played a big part as well.

Othmer was born and raised in Omaha, NE. According to stories, in his youth he earned money picking dandelions from neighbors’ yards, delivering newspapers and telegrams, and walking a farmer’s cow to and from pasture. He graduated from University of Nebraska and received a Ph.D. from University of Michigan in 1927 after which he went to work for Eastman Kodak in Rochester, NY. His research resulted in 40 patents for Kodak, but he grew unhappy earning only a $10 bonus for each patent so he left in 1931 to become a professor at Polytechnic in Brooklyn where he could keep his patent earnings and have the use of graduate assistants for his research and consulting. He often worked six days a week. Othmer achieved commercial and academic success as the co-editor of the Kirk-Othmer Encyclopedia of Chemical Technology which became an industry bible.

His first marriage fizzled but in 1950 he married Mildred Topp, a former high school teacher who had received a master’s degree from Columbia Teacher’s College in 1945. Their wedding was held at the Plaza Hotel in New York City, a sign that they had achieved some significant means at that time. They then settled in a townhouse in Brooklyn Heights. They lived on two floors, and rented out the other three. They never had children.

Warren Buffett recalls that Mr. Othmer’s mother first approached him in 1958 when he was 27 years old about managing some money for the family. At this time Buffett was managing less than $1 million. Other Othmer family members withdrew money, but Donald and Mildred were patient investors. When Buffett dissolved the Buffett Partnership in 1969, the Othmers took shares in Berkshire Hathaway. Donald’s investment had grown to $770,000 and Mildred’s to $817,000.

The couple’s initial Buffett Partnership investment had been $25,000 each. The Berkshire Hathaway that they received in 1970 was valued at $42 per share. That would equate to 18,333 shares for Donald and 19,452 for Mildred. Along the way they must have sold or bequeathed some, because at the time of his death in 1995, Donald’s estate contained about 7000 shares of Berkshire that were sold after his death for just under $30,000 per share. Mildred’s estate at the time of her death in 1998 held 7500 shares valued at approximately $75,000 each.[2]

Florence Ballenger

It was a surprise to many in 1999 that Florence Ballenger, a retired junior college English teacher, was a wealthy woman when she died at the age of 92. Her personal estate totaled $3.6 million and her late husband’s trust totaled about $3 million, having grown from $387,000 in 1985 at the time of his passing.

She did it by saving her pennies and investing in common stocks. Most of her wealth had been accumulated in General Electric that her husband bought in the sixties when he started work there as an engineer.

However, she was also known as a saver who spent little on herself except for her one indulgence of an efficiency apartment in London that she would rent in the summer to escape the Florida heat. She also kept herself busy, volunteering at St. Petersburg Junior College as an English tutor five days a week from the time of her retirement from the school in 1976.

She never had children, and when she died her money went to educational institutions. $1.2 million to St. Petersburg Junior College, her former employer, $1.2 million to her Alma Mater Eastern Illinois University, and $1.2 million to Kennedy-King College in Chicago where she had also taught. Her husband’s trust, which she never took a withdrawal from, left its $3 million to Clemson University in S.C. She was very modest and very particular about trying to live on her social security and teacher’s pension according to a long-time friend.[3] [4] [5]

Theodore and Harvey Baker

Nothing in the history of Ted and Harvey Baker of Chilton, WI spoke of great wealth. Their parents removed them from school in the eighth grade to work on the family farm. Harvey, the older brother, took care of Ted who was mentally disabled. In the late 1950s they sold their family farm for perhaps $50,000 and moved into town to take unskilled factory jobs. How did Ted and Harvey amass $2 million and $4 million estates by their respective deaths in 1989 and 1994?

According to their lawyer they did it through frugality, and by investing in blue chip stocks. The Baker brothers did not turn on lights at night. They cooked in bacon grease, and for years they had no car. According to their long time stock broker, Harvey Baker knew the closing stock prices every day.[6]

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Most if not all of the people described above would be considered eccentric; their frugality something that most readers would find unappealing. However, in addition to frugality, they all seemed to show some form of industriousness, and most were well educated and studious.

While in each of the cases above the players did not have children, which no doubt helped with their saving, the lack of children is more likely the reason why the money was left principally to the charities that spread the word about the gifts, rather than to family.

In each community, while rare, there are likely a few Harvey Bakers, and Florence Ballengers.

How one chooses to spend money is a very personal decision. This is not intended be a lecture on the virtues of frugality since some people would happily spend every penny. What it is intended to highlight is the power of compounding which worked particular wonders during the Nineties when stock market returns averaged 15.9% annually, a rate at which a portfolio’s value will double in only 5 years.

The Eighties, which saw the Dow deliver a 12.9% average annual return, and the Nineties with their 15.9% average annual return produced a lot of stock market believers, and consequently not so many savers. The first decade of the 21st Century has shaken the faith of many in the market.

The 2000s is not the first dark age for stock market returns, nor will it be the last, but in time, handsome returns will come again.

Perhaps what sets these Secret Millionaires from the Nineties apart is that in order to achieve the gains that they did, they had to invest while others shrank from the risk.

These are stories about people who lived through the Great Depression which saw the Dow Jones Industrials lose 89% of its value. They lived through the Thirties when the Dow returned an average of 1.7% per year, and they lived through the Forties when the Dow returned only 3.69% per year. Additionally, they lived, and stayed invested through the period from 1966 when the Dow hit a high of 1001.11 through 1982 when it finally crossed that level for good – a 16 year lost era (save for dividends which can be meaningful) for many buy and hold stock market investors.[7] Yet buy and hold they did, and by investing a little more each year they achieved remarkable compounding.

[1] USA Today, March 13, 1997, pg. 13A.
[2] New York Times, July 13, 1998, section A, pg. 1
[3] The Tampa Tribune, August 18, 1999, pg. 1
[4] St. Petersburg Times, August 18, 1999, pg 1
[5] Chronicle of Higher Education, September 24, 1999, pg. A51
[6] New York Times, July 14, 1996, section 3, pg. 5
[7] Econostats.com

Are Your 401K Costs Too High?

While mutual fund expenses and brokerage commissions receive plenty of attention in the financial press, 401k plan fees are a much less frequently discussed topic. However, both the employers who sponsor 401ks and plan participants can benefit from a review of the topic. This note presents some key information, and then an example of how one firm with a $2.5 million plan could save $16,650 per year, and at the same time add potentailly valuable advice from a fiduciary for the plan participants.

The Department of Labor Weighs In

The United State Department of Labor offers a booklet that provides a detailed look at the fees and expenses paid by 401k plans. This booklet is a worthwhile read for 401k plan sponsors, and may also be of interest to plan participants who would like to better understand various details of their company’s program. Fees and expenses are a particularly relevant topic for plan sponsors since they hold a fiduciary duty to the plans. For plan participants, fees and expenses are one of the factors that will affect their investment performance and impact their retirement income.

As the Department of Labor website points out, fees should not be the only consideration in choosing a plan provider, though they can provide a meaningful drag on investment performance. Employers who are the plan sponsors should recognize this.

The Reality

Particularly at businesses where 401k plan assets are less than $10 million, one finds expensive programs. Employers who sponsor these smaller plans often elect an off-the-shelf, bundled solution where the 401k provider is either a mutual fund or insurance company. These “closed” or “semi-closed architecture” offerings provide one stop shopping for plan design, custody, and investment choices. However, this typically comes at the cost of higher fees and more limited investment options than would be available to participants in a well-designed “open architecture” 401k plan. Such a plan would feature a separate plan administrator, custodian, and mutual fund managers.

The Data Supports the Value of Advice

There is often very little advice provided to 401k plan participants about their investment options and appropriate asset allocation. This is unfortunate because there can be significant improvements to investment performance when employees receive investment advice.

Consultants at Hewitt Associates Inc., Lincolnshire, Illinois, and Financial Engines Inc., Palo Alto, Calif., have published data supporting that conclusion in an analysis of data on 400,000 401(k) plan participants.

The consultants at Hewitt and Financial Engines, both active players in the 401(k) plan services market, found that, on average, the median annual return for participants using investment help was 1.86 percentage points higher, net of fees, than the median annual return for participants who did not use professional help (Life and Health National Underwriter, 1/28/10).

The Numbers Can Be Compelling

An industry record keeper recently provided the following numbers. They illustrate how 401k fees might differ between a broker provided 401k program and one structured in an open architecture with advice provided by a fee-based RIA firm. These numbers are for a 40 participant plan with $2.5 million in plan assets.

Broker Sponsored 401k Sample Cost Breakdown

Administration/Compliance…………………………8.6 bps
Custodian Contract Fee…………………….…….…50.0 bps
Broker Fee – current advisor…………………………………Paid via 12b-1 fees
Net Mutual Fund Expense Ratio…..........…....149.0 bps avg.
Net Cost to Client…………………………..…...…..207.6 bps

Open Architecture 401k with RIA Co-Fiduciary Sample Cost Breakdown

Administration/Compliance………………......……3.0 bps
Custodian Contract Fee………………………..……..0.0 bps
RIA/Co-Fiduciary………………………………....….50.0 bps
Net Mutual Fund Expense Ratio……..…………..58.0 bps avg.
Net Cost to Client…………………………….........…141.0 bps

Savings to Client = 207.6 bps – 141.0 bps = 66.6 bps x $2.5 million = $16,650/yr.

In this instance the plan would save $16,650/year and plan participants would obtain advice from an independent RIA that is a co-fiduciary to the plan along with the plan sponsor.

Conclusion

At a minimum this data about plan costs and the potential benefit that advice can provide should make plan sponsors take a look at their plan expenses relative to the alternatives. Independent fee-based Registered Investment Advisors can play an instrumental role in helping small and medium sized businesses improve their 401k offering; assistance with the creation of a cost effective, open architecture 401k plan and the provision of investment advice being the two most obvious areas.

Calpers Looks at Cutting its Return Assumption

The Wall Street Journal reported this morning that CALPERS, the California Public Employees' Retirment System, is considering lowering its return assumption for its portfolio. Apparently the discussion has focused on lowering the assumption from 7.75% to 6%, though nothing is final.

For some time clients of South Shore Capital Advisors have been hearing that appropriate targets are in the range of 6%. After all, one must consider the impact of fees and transactions costs when contemplating this, and for taxable investors, there is also the bill due to Uncle Sam for income and capital gains.

In addition to the three P's that institutional investors often consider - Philosophy, Process, and People, an important fourth consideration that investors should consider is Price, or the fees that one pays for the service received. While this is not new news it never hurts to be reminded of it, particularly because if the lower return world is in fact the new reality, the fee as a percentage of total return on the portfolio increases. Particular bugaboos of mine are potentially expensive savings vehicles such as variable annuities, and also wrap accounts from brokerage firms that posess high fees in order to cover the expense of a.) the management of the assets, b.) the compensation to the broker/advisor, and c.) the take for the brokerage firm itself.

Taylor Thomas

External Debt To GDP For PIIGS, BRICs and a Few Others

The CIA and World Bank websites offer current data on External Debt to GDP. I recently gathered this data and created a table of these statistics for a select group of countries that have been in the news lately - Portugal, Greece, Italy, Ireland and Spain - the PIIGS. While I was at it, I also pulled data for other key countries in order to use it as a basis for comparison.

External Debt is the total public and private debt owed to non-residents, repayable in foreign currency, goods and services.

The goal here is to merely shine a light on the topic and to offer what I believe are a few simple truths:

First, the world is a very interconnected place! Countries and their banks own a lot of each others' assets. Given the leverage this table illustrates, the problems of one country's government or its largest financial institutions can quickly spread to others if a cross border contagion develops.

Second, there are a number of countries that would be hard pressed to bail out their own banks. Think Ireland, and the United Kingdom.

Third, this is yet another measure where Brazil, Russia, India and China - the BRICs - look to be in good shape.

Lastly, all this debt underscores why deflation is potentially a greater threat than inflation. Banks want the value of the assets they lend against to rise not fall, and governments need the value of their tax revenues to increase not decrease. Deflation means shrinking asset values, fewer capital gains and smaller incomes.