2011 July Newsletter – Politics and the Economy

On July 5th, 2011, posted in: Economic News, Newsletter by

WHAT HAPPENED IN THE ECONOMY?

The markets rebounded somewhat in light of the Greece bankruptcy being postponed. Their politicians are obviously as devoted to spending as ours in the US. It is hard to find ways to cut excess spending when everything is a necessity.

Economic news reported personal incomes increased 0.3% in May with a similar increase in April. March came in at 0.4%.   During this time income shifted slightly towards non-wage income as job growth slowed markedly these past few months.

However, despite the increased income, consumers didn’t spend it.  Reports showed the national savings rate increased a little from 4.9% in April to 5.0% in May.  Did you know consumer spending represents nearly 70% of GDP?  Currently, businesses are sitting on huge amounts of cash and so are consumers. The economy will not grow and jobs won’t increase until confidence is restored. That is a common formula for our economic engine.

Here are some indications of what is impacting consumers spending:

  • Low Consumer Confidence – the index of consumer confidence established by the Conference Board dropped to its lowest point since November 2010.  They indicated the decline “was driven by a less favorable assessment of current conditions and continued pessimism about the short-term outlook.
  • Gasoline Prices – entering into summer, prices are higher than a year ago, but have declined from the nearly $5.00 per gallon price of several weeks ago.
  • Market Conditions – until this week, prices had steadily declined six consecutive weeks. But the sharp increase in share prices may improve consumer attitudes.
  • Housing Prices – the Case-Shiller housing index continues to decline coupled with a reported drop in private residential construction spending by the Commerce Department.
  • Continuing High Unemployment – initial jobless claims (428,000) are still way too high to expect any meaningful reduction in unemployment.
  • Durable Goods – orders for durable goods increased nearly 2% in May, higher than the consensus expectation of 1.5%. Business investment as a percent of GCP is an annualized rate of 7.2%.

It is apparent the economy is attempting to grow, despite the employment figures. There are lots of stops and starts and the economy is trying to throw off months and months of bad news and poor management. Stay tuned.

WHAT HAPPENED IN THE MARKETS?

Sometimes I think the markets and the economy are disconnected. Good news causes a decline while bad news causes a rise. The stock market performance was one of its best in several years.  The major indicators were up every day as 2Q ended 2011.  The Dow [+5.43%; +8.68%], the S & P 500 [+5.61%; +6.52%], and the NASDAQ Composite [+6.15%; +6.15%] all registered impressive gains. Past performance is no guarantee of future results. Indexes are not available for direct investment.

So, what was the underlying cause? Here are some factors that may have influenced the optimism:

  • Contrary to the reports, the world didn’t end when “QE2” stopped June 30. You may remember the Federal Reserve was buying bonds and it was to come to an end June 30.  With the long holiday weekend, there is no way to know what will happen, but Treasury yields did jump higher for 30-year and 10-year bonds. The concern here is no one will buy Treasuries with yields so low. Hence, inflation may ensue.
  • Preliminary reports are showing corporate earnings will not fall off a cliff for 2Q. If they are good, the market will probably continue to rise.
  • All eyes were on Greece until they passed legislation enabling them to borrow €12 billion from the European Central Bank (ECB) and the International Monetary Fund (IMF). “Hold hands and don’t let go” is the mantra.
  • Despite an increase in oil prices, gasoline prices fell. This coupled with the government releasing some of our strategic reserves, may give consumers a little more confidence they can still have a vacation.

Looming on the horizon is the death struggle between political factions over the federal budget and the U. S. debt ceiling. The August 2 drop dead date is evidently going to be the target. So there will be a lot of back and forth – rumors of this and that in the meantime. Senator Schumer announced President Obama may just bypass the process and continue to fund the government despite the impasse. Good Luck!

So look for more posturing. Everyone knows this is the last big battle between now and the 2012 election. So many may view this as the potential end game for their career on the government dole. It reminds me of the game “hot potato.”  Even Alan Greenspan, former Fed Chairman, says he thinks there could be a technical default before some sort of compromise is reached.

What’s the End Game?  We are probably going to have to wait and see while this plays out. Meanwhile, if corporate earnings do go up and interest rates stay under control, we could see a real bounce in stocks between now and the end of the year.

WHAT IS HAPPENING IN PERSONAL FINANCIAL PLANNING

One of the biggest concerns facing most retirees is whether they can make their income last until death. With life expectancy improving and medical techniques continuing to find life saving methods, it is hard to believe this issue is going to go away.

Insurance companies have become very creative and designed numerous distribution options that can guarantee income for life. There are TWO problems we currently are sorting through. First, when someone elects an income for life option, they give up a lot of flexibility with their remaining capital. Second, there are limited (and expensive) provisions for inflation.

We feel the best way to handle the need for lifetime income is to use a three bucket approach. Set aside capital to provide income for the first two years in bucket one. Set aside capital to provide income for years 3-5 in bucket two. And then invest bucket three to replenish bucket one and two over a 5-10 year period.

Based on our analysis, rolling 5 year and 10 year market performance can grow the remaining capital as well as the annuities offered by insurance companies with far more flexibility and inflation protection.

 A FAVORITE FINANCIAL WEB SITE

www.bloomberg.com – This is a good place to go to do comparative analysis of stocks and bonds. There is also an “app” for your iPad, if you have one.

FINANCIAL FACT OF THE WEEK

In case you missed it, the US Postal Service is “suspending contributions to workers’ pension funds, as it continues to lose money.  It was $8 billion in the red last year due to the effects of the recession and the loss of business to the Internet.”

 

This information is compiled by Guy Baker from an assortment of news feeds including First Trust, Yahoo Finance, Bloomburg and others. This information is intended to be informational only. This newsletter contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Investing involves risk, including the potential for loss of principal. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy.

 

 

 

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