Positive Vibes!

With a new year approaching, it is time to reflect briefly on this past year and look ahead. Let’s first consider bonds and how they reacted during the year. With a drive to reduce interest rates by the Federal Reserve Board (FRB), we saw short-term interest rates approach 0% and longer-term rates drop to new 30-year lows, thereby increasing the value of bonds. This situation dominated for most of the year until the FRB decided that they wanted to see a higher rate of inflation and began dumping money into the economy in November. This has resulted in interest rates rising and the value of bonds decreasing in value. Assuming that the FRB continues in this vein, moving more fixed investments into shorter duration positions--where the risk of inflation is lower but the returns are also lower--will be necessary. This will be good news to stock prices that should advance in 2011, as investors look for higher returns and leave bonds to invest in stocks. Stocks also have the attribute of tending to move, over time, up with inflation. In 2010, stocks made progress in price increases, but with a great deal of volatility. If we look at the gain in the S&P 500 from the close on January 4, 2010 until the close on December 20th, we see the index move from 1144.98 to 1247.08, or about 6.3% gain for the year. Not great, but not bad either. Stomaching what was happening during the year was difficult. With the S&P falling from the beginning of the year to 1022.58 at the close on June 28, or a drop of about 10.7%, some investors found it difficult to hang in during such a large correction! Currently, the stock market has been moving up and is likely overbought (prices too high). A small correction in the range of perhaps 2% is likely over the short run, but we are in a bull market that still appears to have a long way to go. In summary, it appears that investing in bonds with maturities that go out more than 5 years could be a bad idea in 2011 if inflation increases, but investing in stocks will likely be a good idea, assuming that we do not have any major domestic or international incidents. Many investors became frightened during 2007 through 2009 and went very conservative with their portfolios. During 2009 and again in 2010, the conservative investor did well, as bonds reached new 30 year lows. It appears that this will not be the case in 2011 as the bonds may lose value or achieve small gains. Investors need to review their willingness to take risks and consider reevaluating their risk profiles. I would like to take this opportunity to wish you a healthy and invigorating New Year! Ed Mallon

To Tax or Not to Tax?

The burning question in Washington, currently, is about the Bush-era tax cuts. Some say continue for all, others say continue for all but the rich, and others say don’t continue any of the cuts. We are spending about $1.2 trillion a year more than the federal government is taking in from taxes. I may not have my calculations correct, but I believe that, by letting the Bush tax cuts expire, we will generate about $200 billion of added revenue each year. That still leaves us will a $1 trillion shortfall, which suggests that spending must be cut substantially as well. The reason we hear most often for not allowing the tax cuts to expire is that spending by consumers would be cut (less money to spend) and the economy could slow down. The same rationale is given for extending the federal job loss benefits for an additional 13 months, which is another big expense. Recent studies have pointed out that some of the increasing joblessness is caused by the continued extension of jobless benefits, which has allowed people to hold off getting a job for a lengthy period of time, and during that time, their job skills erode. As I look at the substantial sacrifices that the people in Greece, Ireland, Spain, and Portugal are having to make to get their countries back to financial stability, I keep thinking that we need to move quickly to avoid taking draconian measures later! None of us likes taxes or cutbacks on entitlements, but without financial stability, life as we know it in the U.S. will change significantly. In looking at the suggestions of the bipartisan deficit reduction committee that was established by President Obama, it seemed to me the entire document should be adopted! My burning question is: can the politicians put politics aside and do what is necessary for the long-term economic health of our country? Our founding fathers sacrificed to put us on the road to greatness. Let’s not exit that road now. Ed Mallon