Are we out of the woods yet?

My big question is: are we out of the woods yet? As investors, the biggest problem that we have experienced over the past six years is the high level of volatility in the stock market. Depending on good news or bad news, the stock market seemed to have had a knee jerk reaction to dispersed information. This has changed. Since the end of last year, the market has risen steadily. The only glitch was on February 25th, when the market took a rather big drop and then recovered. The “News Factor” is moving the market less, as we have seen with the bailout of Cypress. There is an old saying in the market: “the trend is your friend!” The trend appears to be upward. Looking at the long term, the U.S. Stock market appears poised for an extended rally as the economy continues to improve. I have no doubt that there will be bumps along the way, but moving forward, we want our clients fully invested in stocks relative to their risk tolerance. As I have noted in previous blogs, I still have concerns about the lasting value of intermediate to long-term bonds. At some point, the Federal Reserve will begin to allow interest rates to increase. When this happens, the principal value of bonds will begin to decrease. To mitigate this, we are using more short duration bonds in our mix. I am currently going through our clients’ asset allocations to make any necessary adjustments.

Taxes and Spending

Today we heard that the economy grew, just barely, at a 0.1% rate in the fourth quarter of 2012. Many reasons were given for this lackluster growth. To me, the most important part is that, at the beginning of 2013, taxes rose for all working Americans, with the increase in the payroll tax. Consumer spending accounts for about 70% of the economy. Higher taxes leave consumers with less to spend, so a rise in taxes generally dampens the economy. Now we are looking at a major reduction in U.S. Government spending, to begin March 1st. This too will impact the economic growth in the U.S.

For several years now, the Federal Reserve has been keeping interest rates low in an attempt to help the sluggish economy. This may now be more than offset by the tax increases and reduction in spending.

We are at a real juncture. The citizens of the U.S. want their entitlement programs left untouched: e.g. Social Security, Medicare, Obamacare, etc. Only 53% of the population pays income taxes and they don’t want to pay any more. So, we don’t want to cut spending and we don’t want to raise taxes. Sorry, can’t be done!

Congress and the President don’t seem to be in the mood to compromise. The pieces will fall as they may, leaving the consumer and business to pick them up and work with them as well as possible. Overall this scenario doesn’t seem to be good for our short-term economic outlook!

Ed Mallon

Economic Drag

The Labor Department today reported 366,000 new unemployment claims. The really good news is that the four-week average is 350,500. A number like this indicates that business is maintaining the best rate of employment since early 2008. The Labor Department also indicated that 157,000 new jobs were created by business in January. While this is not great, and we are looking for something in the 350,000 to 400,000 jobs range, it is better than a year ago.

The report also noted that in the 4th quarter of 2012, Americans worked more hours but business output was flat! Non-farm productivity fell by 2% during the final quarter and labor costs jumped by 4.5%. The GDP dropped to an annualized rate of 0.1%. These are not signs of a robust economy.

The Federal Reserve is buying bonds and mortgages at the rate of $80+ billion monthly, in an attempt to stimulate the economy. Millions of people are out of work and the unemployment rate has moved back up to 7.9%. With all of this mixed news the stock market continues its surge, with the S&P 500 up about 5% in January. Overall, it would therefore appear that we are holding our own but with a feeling of trepidation!
Ed Mallon

Old War Horses

The idea that "old war horses never die" is, fortunately, wrong. For years in Washington, we had Senators and members of Congress who knew the art of cutting a deal, where each side won and also lost. We had people like Tip O'Neill in the House and Ted Kennedy in the Senate, who worked out deals, doors closed, without the need to go to the brink. Much has been written about the impact of the new tax deal on average and wealthy taxpayers, but how in the world did we avoid the "fiscal cliff”? During this most recent budgetary crisis, various discussions among combinations of leaders like President Obama, the majority leader of the Senate, Harry Reid, and the House Speaker, John Boehner, could not come up with a workable deal. I kept wondering what had happened to the leadership in Washington. This deadlock was one for the books. But, like magic, leadership finally did emerge! With the House in gridlock and the Majority Leader of the Senate unwilling to budge, Senate Minority Leader Mitch McConnell called Vice President Joe Biden. These two "old war horses" worked together and came up with a solution. Was the solution perfect? No. Did it resolve the crisis? Yes. It may not mean much to most people, but for me, it gave me hope. Thank you, Joe Biden and Mitch McConnell, for showing us Washington can still work. I hope you will keep it going.
Ed Mallon

Double Dare

When I was a kid, we use to taunt friends by saying, “I Double Dare YOU,” to do something. Since becoming an adult, I don’t think I’ve used this expression. What brought it to mind was the inability, last night, of the Speaker of the House, Boehner, to get consensus in the Republican Party, for “Plan B,” to avoid the “Fiscal Cliff.” It’s almost as though his colleagues were saying, “We Double Dare YOU to go over the ‘Fiscal Cliff’.” It appears that to move forward, Boehner will have to work with President Obama and Senate Majority Leader Reid, to develop a solution that a majority of House Republicans and Democrats can accept. The clock continues to tick, even as the House Republicans go home!

I feel very blessed to be working at Secure Planning. We don’t do double dares. The group has worked together for many years, has built a relationship with each other and with our clients. I wish each of you a peaceful holiday and a happy and healthy New Year.
Thank you!
Ed Mallon

Value Added

One of the major advantages of a capitalist system is the concept of “value added”. In practice, the concept is very easy to understand, but not likely to be taught in most schools. As I have watched the President and Congress work on the "Fiscal Cliff" (which they created), it has become clear to me that either they do not understand this concept or know about it. When land lies fallow, it has no economic value. When the farmer buys seed, for say $1,000, plants it in the fallow land and harvests a crop worth $10,000, that is added value. When a manufacturer buys steel costing $1,500 and converts it into a product that sells for $15,000, that is added value. Many Americans believe that a finite amount of money and wealth exist in this country and therefore it needs to be “redistributed”. This is nonsense! The amount of wealth that can be created is almost limitless. Manufacturing, agriculture and transportation are examples of value added businesses. The understanding of this concept is very important. Manufacturing adds wealth to the economy, so we need to develop more manufacturing to move the economy forward. The Institute for Supply Management announced earlier this week that their index had slipped to 49.5%. This is the lowest the index has gone since July of 2009. It means that, even though manufacturers have lots of money, they are not spending it, resulting in a sharp contraction of goods production and contraction in the number of related jobs. They are in effect saying, we don't trust the government to get their financial house in order! As manufacturing stalls, the economy stalls! The growth in GDP this quarter appears tepid and, without action on deficit reduction and tax increases, the economy could slide back into a recession. Long-term, I believe, manufacturing is going to be very important to the prosperity of the United States. As I keep reiterating, we have a stable government, high productivity, high quality, and low-cost natural gas. All of these could bring us back to being the most successful manufacturing country in the world. That means lots of value added, creating more jobs, more revenue for the government and higher interest rates for retirees.
Ed Mallon

Investment Falls Off a Cliff

The above was the headline in the Wall Street Journal this morning. The article goes on to discuss the curtailment of capital spending by many major corporations that are sitting on large amounts of cash. The companies are reducing their investments in equipment, buildings and software. Previously, these types of investments helped pull us out of the recent recession. The article indicates that these large corporations are worried about the fiscal and economic uncertainty they face. If large companies are worried, small companies must also be worried! How about consumers? It was reported on Saturday that retailers are seeing consumers cutting back, making retailers worry about sales during the holiday season. This all seems to be rather negative news. With this as a backdrop before the opening of Monday’s stock market, you might think the market would plummet. You would have been wrong. The S&P 500 went up over 1.5%! In any stock market correction, the price of stocks decrease to a point at which buying becomes stronger than selling. This can last for a short time, generally 2 to 7 days, followed by a resumption in a downward direction. The past couple of weeks have taken a toll on the stock market, putting it in a technical “oversold” position. This rebound has been expected. Sometimes the news is reporting facts that the stock market has previously built into pricing. The “big deal” is still the Fiscal Cliff. Late last week, when the president and congress were seen as working together on this issue, there was a sense of optimism that they might resolve the looming problem. As I noted in my blog “The Fiscal Cliff!”, the issues are difficult and will require a great deal of compromise to resolve. Compromise is not something that comes easily to Washington these days. We can continue to hope for the best but, as with the large corporations, keep our money secure!

I would like to take this opportunity to wish each of you and your families a very Happy Thanksgiving!

Ed Mallon