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It has been a tumultuous decade starting with 9/11, the wars in Iraq and Afghanistan, natural disasters (hurricanes, earthquakes, floods, tornados and fires), the financial crisis starting in 2008, and upheavals in the Middle East and the continuing financial problems in Europe. All these events have combined to cause worldwide recession and slow economic growth particularly in Europe and the US. With the mortgage meltdown and the continuing high unemployment rate, you would think that there is little to be thankful for this holiday season, but you may not be seeing the forest for the trees.
The Money Pit
Zero net non-farm jobs were created in August. Likewise, QE1 and QE2 have not boosted economic growth and we certainly do not need a QE3. The Fed has nothing left, and it is not their job to stimulate the economy. Policy decisions coming from Washington will be instrumental in determining our economic recovery. Intentionally or not, Fed policies are propping up our stock market. With the daily bombardment of bad news around the globe you would think equity prices would be in a free-fall. However, corporate earnings are relatively strong and we are still the safest haven for investor money.
In Greece and Italy national debt now exceeds GDP. Spain and Ireland are not far behind. It is causing turmoil in equity markets across the globe. Meanwhile, here in America Congress pats themselves on the back for finally agreeing to their own debt solution. They must not have been reading the papers as our debt just surpassed our GDP and Standard & Poors dropped our credit rating from AAA to AA+. Our debt is now like the Titanic waiting for an iceberg. So what did Congress accomplish? Its not clear. The best we can tell is Congress agreed to cuts of $900 billion over ten years.
A Framework for the Equity Market Correction
Corrections of 5-10% are fairly common, even in bull markets. The major indexes usually experience corrections of this magnitude two to three times a year. As investors, we certainly fear them while they are happening, but tend to forget about them once they have passed. The current 11% correction has heightened fears due to the compressed time frame in which it has occurred.
Commitment to Excess
The current debt debates taking place in Washington would be amusing if they weren?t tragic. What is the sense of having a debt ceiling, if we just keep raising it? There have been 75 increases in the debt ceiling in the last half century. So who is buying the new debt issued by the Treasury to pay our bills? It?s not Japan. They have their own fiscal problems right now. China? They are reducing their exposure to dollars. It?s certainly not Europe. That leaves the Fed. In effect, we are issuing more debt to buy from ourselves. Every hour the US spends 1/5 of a billion dollars it doesn?t have.
Bad News Bulls
It?s been said that the stock market climbs a wall of worry. The bear market touched a bottom in March 2009 and proceeded to rise about 85% to a high in April. We are now in the midst of a correction from that high, but the overall trend remains positive for equities. Not so much so for the economy. Well, the economy is still growing, albeit slowly. At this stage in a recovery the economy should be recovering more rapidly. The economic news is not getting better. The May jobs report indicated that 54,000 new private sector jobs were created. Economists had forecasted 170,000.
The other Achilles heel is what Representative Paul Ryan calls ?the most predictable crisis in the history of the country.? We are talking about debt and it has one cause ? spending. Congress prefers to kick the can down the road and let the next generation deal with it. Now that Congress has passed a budget bill for the fiscal year ending this October, perhaps they will get serious about cutting spending ? more than the recent 1% budget cuts.
Since the beginning of the Republic, the US has been invincible, overcoming many disasters. The US was first made aware of its Achilles heel during the 1970s oil embargo. Fortunately, the Middle East agreed to pump more oil, and the negative impact on the economy was short lived. The ensuing financial crisis pushed oil back to $32 per barrel in 2009. The global economic recovery has once again caused heavy demand and rising prices for the liquid gold. Now, however, we add tensions in the oil producing countries in the Middle East and we have a perfect storm brewing.
The current unrest in Egypt actually began in Tunisia and the tipping point there was when a young man immolated himself over government harassment over a business permit. Trouble had been fomenting in the streets, but this was the tipping point that escalated the turmoil that spread to Egypt and could ensnare Jordon, Syria and even Saudi Arabia. This almost certainly will turn into a different state that will have ramifications well beyond the Middle East. These are exciting times and the world faces many tipping points that will change many established paradigms.
The financial markets by themselves do not recognize time. It doesn?t matter if it is August 9 or January 2. Time does, however, matter to investors. There are always tax considerations, window dressing, estate planning and numerous other factors that coincide with the end of the year and the beginning of a new year. For many (particularly mutual funds or investment advisors) it is a horse race. Anyone in the investment business is judged on performance. In order to retain and attract new clients one must consistently outperform the popular market indexes. So here we are again: it?s post time.
Santa came early this year. After much haggling Congress has agreed on a deal to extend the Bush tax cuts for everyone for 2 more years. If this extension hadn't been passed, the ensuring tax hike would have hit Americans $3.2 trillion over the next decade. This is money that can now be available to invest and to create new businesses or expand existing businesses. This will not only help to create jobs, it will also help retired Americans living on dividend income. A boost in retail sales is also in Santa?s bag: taxpayers will keep about $900 billion in their pockets over the next 2 years.
Don't Shoot the Messenger
This election has seen the installation of some non-political, business type people into office. These people know how to start a business, hire people and meet a payroll while balancing the books. We take this as a plus as capitalism is still the best economic system and will flourish in a regulatory friendly environment. We hope both parties (or is it three?) have a better understanding of the word bipartisan. That?s what it will take to avoid gridlock and get this country moving forward again. So what can Congress and the President do to right this ship? We would have several suggestions.
Now that the economy is truly now global, countries are adamant about protecting their currencies so that they can be competitive in the world market. The Bank of Japan just announced plans to limit the surging value of the yen against the dollar and the yuan. This will make their imports more attractively priced in the world market. Ben Bernanke at the Fed is considering phase two of quantitative easing for the same purpose. The exchange rate for currencies will continue to rest on the shoulders of the U.S. for some time.
Look for the Silver Lining
As an investor it is important to keep your eye on the big picture. Daily news items are causing extreme volatility in the market place, and investors focused on these daily news items will be whipsawed in this market environment. The money supply is growing and there is plenty of capital in short-term bonds and money market funds just waiting for better investment opportunities. As momentum builds in the economy, this money will flood into investments that create real private sector jobs.
Deep in the Heart of Taxes
In the investment business we deal with both reality and perception. In the case of taxes we are dealing with reality. As tax laws change, the investment landscape is also changing, and we are spending many hours analyzing these changes to determine which investment areas will benefit from tax changes and which will be hurt. Investors should start to review their investment objectives for the coming year or even decade. Dana also comments on good news from the job front.
Jobs, Jobs, Jobs
The February jobs report indicated that we lost 36,000 nonfarm jobs last month. The overall unemployment rate stayed flat at 9.7 percent. Dana Investment Advisors, however, prefers to look at trends. In late 2008 and early 2009, the economy was losing more than 400,000 jobs per month. We are now down to 35,000-50,000 per month, and employment numbers could turn positive in the months ahead. Corporations cut employment to the bone and increased productivity to the point that any recovery in the economy will necessitate new hiring.
It's a Great Day for America
Michael Dana of Dana Investment Advisors says the U.S. economy is ready to move forward on the jobs front after a 5.7 percent GDP growth rate in the fourth quarter of 2009, but claims employment gains will depend on lower tax rates on capital gains, dividends, corporations and individuals. He also comments on new natural gas drilling techniques, and the reappointment of Fed chairman Ben Bernanke.
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