My Comments and Opinions
Second Quarter, 2009
Economic Overview.
From the market lows of March 9, 2009, when the Dow Jones Industrial Average closed at 6547.05 to its close on June 30th at 8447, U.S. and global markets have rallied, even in the face of continued pessimism. As I'm writing in mid-August, near the end of the quarterly earnings season, the S&P 500 is up about 50% since the March lows. Some market mavens are calling this the beginning of a new bull market. Others still think we're in a bear market and have just experienced a short-term rally. I favor the bulls. A number of technical patterns and fundamental factors are turning positive. Over the past eighty years, large U.S. stocks averaged a gain of 10% per year. The dollar lost about 3% per year in purchasing power. Stocks annually outperformed inflation by a factor of about 3. Compounded over eighty years since 1926, stocks beat inflation by about 170 times.
Those of you who have visited my office are familiar with the Ibbotson/Morningstar Stocks, Bonds, Bills and Inflation 1926-2008 chart on the wall. This chart, favored by many in financial services, graphically demonstrates how U.S. stock and bond markets have performed over the past eight decades when compared to inflation. If you have access to this chart, observe that V-shaped market drops and recovery patterns have been the norm. Note that most 'highs' have been higher than the prior high and most 'lows' have been higher than the prior low. The stocks chart a zigzag uphill rise. If the recent strong upswing can be sustained, a new bull market is in the offing. What went down fast has been coming back quickly. Is another "V" pattern in the works? I think so.
To date, this recession is the longest since WW II. The U.S. Bureau of Labor Statistics reported that during the Second Quarter the U.S. economy shrank by 1%. Our civilian workforce employed 154,912,000 men and women over the age of 16. The composite unemployment rate was 9.2% at the end of June and is now about 9.4%. Real Earnings fell by 1.2% from May to June. Productivity was up 6.4%, due in part to the higher unemployment rate in the quarter. For non-government workers, the average hourly wage in the U.S. in June was $18.00. About 70% of workers in the private sector had access to employer provided medical care. State and government employees had access to pensions (89%) and health benefits (87%) based on the National Compensation Survey. Most employees are covered, but how well and at what cost? These are some of the issues we face today.
The past quarter saw substantial improvement in domestic and global stock prices, signs of future economic growth, a shrinking of inventories, level or negative inflation but also worsening unemployment. The July 17, 2009 edition of the St. Louis Post-Dispatch identified fifteen states with unemployment rates of 10% or more including Michigan, California, Florida, Illinois and Georgia. An increasing unemployment rate is normal, though painful, as recessions turn into recoveries. The U.S. stock market has almost always turned up prior to the end of each recession experienced during the last 100 years, according to research done by The Securities Research Company. The stock market is called a leading indicator because investors look ahead to better times near the end of a recession. They buy stocks which they consider to be bargains before they "go back up." Unemployment is called a following indicator. It takes time for employers to have enough new sales to bring back laid-off employees once the economy perks up.
On August 12, 2009, the Federal Reserve Board of Governors issued a press release. Here's the opening paragraph: "Information received since the Federal Reserve Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in the context of price stability."
Inflation is tame, at least for now. The hundreds of billions of dollars printed to help our economy recover and grow have been slow to arrive. Only about 10% to 15% of the $787 Billion from The American Recovery and Reinvestment Act of 2009 has been put to work. Recall that this is the spending bill that Congress rushed through, although not even one single member of Congress read it before voting it in. In my opinion this was a case of hurry up and hope it works. I hope it works soon.
Standard & Poor's Case-Shiller Index, which observes and reports on residential real estate prices and trends in 20 U.S. cities, reported a slight price increase of 0.5% for the three months ending May, 2009. Some regions were in better shape than others. The July 27, 2009 Christian Science Monitor covered the news release from the U.S. Commerce Department announcing that new home starts for June rose 11% from the prior month's level. Real estate, like politics, is always local.
Social Security and the Other Unfunded Mandates
This is not opinion. It is fact. I found this paragraph on my own Social Security Annual Report. The next time you receive your Social Security Statement look for the following: "In 2017 we'll begin paying more in benefits than we collect in taxes. Without changes, by 2041 the Social Security Trust Fund will be exhausted, and there will be enough money to pay only about 78 cents for each dollar of scheduled benefits."
We the People have now racked up a total national debt that exceeds the debt of all Congresses and Administrations since the founding of our nation. Ben Bernanke, who in my opinion is an excellent Chairman and should serve another term, is a scholar and student of the Depression. With the Congress and Bush and Obama Administrations he moved quickly to prevent another global depression. We may not like the debt that's been piled on, but our public servants did what had to be done. They kept credit flowing and the economies of the world going.
The national debate on overhauling our healthcare system heated up during the last quarter. There are at least three proposals in Congress. Two proposals are in the Senate- one with the tentative name of The Affordable Health Choices Act that originated in the Senate Health, Education, Labor and Pensions Committee, and another, still in a very formative stage and un-named, is with the Senate Finance Committee. The House of Representatives bill, H.R. 3200, is 1,017 pages long. You can access this document online. Search: U.S. House of Representatives. Request H.R. 3200 in the Search House.gov box. You might even read it before your elected officials get around to it.
How will we pay for bailouts, stimulus packages, pork spending, healthcare overhauls, Social Security, Medicare and Medicaid? Will Congress raise taxes during a recession? Will other money-saving reforms find their way to Washington? To put a fine, if ironic point on the spending issue, the Communist Chinese recently chided America for spending too much money. Yes, the Communist Chinese. China sells us goods and gets paid in dollars. They hold this currency in the form of United States Treasury Bonds. They're worried that we will debase our currency because of the huge amount of new money we're printing, resulting in a devaluation of the dollar vs. other currencies. The goods they sell us will cost us more, causing us to buy less from them. Also, the U.S. bonds they hold could drop in value. A cheaper currency buys less. That's why travelers are more likely to go to places where their own money buys more.
Benjamin Franklin warned us about accepting government benefits at the cost of our liberty: "Any society that would give up a little liberty to gain a little security will deserve neither and lose both." I think if Poor Richard were alive today to give advice he would caution us to be more frugal as a nation. True, this is not the Eighteenth Century. We have become a highly complex society. But the basic rules of common sense should still apply: Don't spend what you can't afford. Don't burden future generations with your debts. John Adams and Thomas Jefferson, the Second and Third Presidents of the United States, original Founders of our nation, signers of the Declaration of Independence, political friends early in the struggle, political opposites later in their careers, finally came back together as friends by letters exchanged during the last years of their lives. They both died within hours of each other on July 4, 1826, fifty years to the day of the signing of the Declaration of Independence. The frugal Adams left a net estate of about $100,000. Jefferson, having spent more than he earned for decades, died $100,000 in debt.
The year that Cher, Sally Field, Reggie Jackson, Dolly Parton and Sylvestor Stallone were born, 1946, vitamin D milk cost $0.70 per gallon, eggs were $0.22 per dozen, a movie ticket cost $0.55, tuition to Harvard University required $420.00 per year, an average new home - $5,600.00. The average salary was $2,500.00 per year. (source: Seek Publishing, Birmingham, AL). It's commonly called inflation. It's really the loss of purchasing power.
Members of Congress should be making the rounds to their districts (representatives) and home states (senators) to meet with the voters, answer questions and take our comments and opinions back to Washington for the fall session so they can debate health care and other important issues. Some of these people have not met personally with their constituents. (I write letters expressing my opinions to my reps and senators.) Call them. Ask for answers. These people are salaried employees, not royalty. Specifically, health care issues are near and dear to all of us. We are a very large country and have many problems. I believe that the answer is to fix what needs fixin' and leave be what's not broke.
In my opinion the United States will go through another period of higher inflation, not this year, but within the next few. As we have printed trillions of extra dollars each one, according to the law of supply and demand, is worth less.
My Continued Advice
- Own a debt-free home, or have enough financial resources to pay for housing and life's necessities as prices rise over the years.
- Own a diversified portfolio of fixed instruments, stocks and bonds.
- Own enough of the right kinds of insurance. Life can throw us a curve anytime.
- Own the necessary legal documents: a will, maybe a trust, a durable power of attorney, a state health proxy or living will. Buy-sell agreements for business partners, etc.
- Have three advisors: 1) Your own Attorney, 2) your CPA or Enrolled Agent, 3) a qualified financial advisor (CFP, CFA, CHFC, and/or Registered Representative). The first two should know what the third one is doing. Too many trusting people have been defrauded by clever fraudsters. Never sign any important document without your attorney's advice, especially real estate. Too many mistakes are made by hasty decisions.
- Create your own financial plan to pull together all of the threads of your financial life. I recommend that you work with a Certified Financial Planner TM practitioner, for example,
DISCLOSURES
The views expressed contain certain forward-looking statements. Although they are forecasts, actual results may be meaningfully different. This material represents an assessment of the market and conditions at a particular time and is not a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any security in particular. The opinions expressed are mine alone and do not reflect any opinion of National Securities Corporation, my Broker/Dealer, or any of its Affiliates. Securities offered through National Securities Corporation, Member FINRA/SIPC. Investment Advisory Services offered through National Asset Management, Inc., a Registered Investment Adviser. Accounts carried by National Financial Services LLC, Member NYSE/SIPC. Sources for this letter include the Wall Street Journal, "Sixteen Rules for Investment Success" by Sir John Templeton, thirty-three years of experience in financial services, and my own common sense.
Wishing you success,
Robert W. Brimmer, CFP™
BRIMMER FINANCIAL
rbrimmer@nationalsecurities.com
59 Finlay Road - P.O. Box 2806 - Orleans, MA 02653
tel. 508-240-0320 fax 508-240-2309 toll free 800-237-9322
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Securities offered through National Securities Corporation, Member FINRA/SIPC.
Investment Advisory Services offered through National Asset management, Inc., a Registered Investment Adviser and affiliate of National Securities Corporation.
Accounts are carried by National Financial Services LLC, Member NYSE/SIPC, a Fidelity Investments Company.