Fourth Quarter, 2009
My Comments and Opinions
Summary
If the stock market and the economy were parts of a train, the stock market would be the locomotive and the economy would be the caboose…most of the time. During the last three quarters of 2009, the global stock market moved uphill long before the economy was pulled out of the valley. This followed the typical pattern where growth in an economy often occurs months after an increase in the markets. Justin Lahart, writing in the January 30, 2010, Wall Street Journal, reported that the U.S. economy grew at 5.7% in the quarter ending December 2009, subject to future revisions, of course. Quoting Mr. Lahart from the same article: “Of the 5.7% rise in gross domestic product, 3.4 percentage points came from businesses shrinking inventories more slowly than in the previous quarter. That's a plus for economic growth: When businesses pull fewer goods from warehouses, they have to produce more. Total inventories fell at an annual rate of $33.5 billion in the fourth quarter, compared to a $139.2 billion reduction in the previous quarter.” This was the best quarterly gain in 6 years.
The Dow Jones Industrials 30-stock index began the 4th quarter at 9509 and closed the year at 10428, an increase of 919 Dow points. In about nine months the Dow moved up from a low of 6547, an increase of 3881 Dow points. To get back to the all-time highs of October, 2007, the Dow Jones will have to visit 14164, another 3736 points from the close on Dec. 31st. Another way of saying this is that the Dow managed to move up to the half-way point between the March 9, 2009 low and the Oct. 9, 2007 high.
As I'm putting data together for this letter we're likely in a market course correction that usually follows a strong upward move. Nobody knows how long or deep a reverse market move will be. We just know that the markets usually act like this following a period of good performance. It's often said that traders and speculators are taking their short-term profits out of play after a profitable short-term run. Some investors may need money for tuition or a down-payment. They withdraw after an upswing in prices, taking advantage of the gains. Others get nervous and just sell when they think another downturn is developing. That's what makes a market. Buyers and sellers. No one knows the short-term future and everyone has an opinion, especially the talking heads on TV. According to the Dalbar report mentioned in prior letters, investor performance is a function of investor behavior more than investment performance. One of my jobs is to coach and occasionally recommend 'don't do that' when some one gets scared. Again, look to history for its lessons. It marches on and eventually, up.
Trade Deficit
China continued to peg their currency, the Yuan, to the U.S. Dollar, giving them a decided trade advantage over us. Because of the lower-than-market value of the Yuan, Chinese goods are artificially cheaper for us to buy, but American goods are more expensive for them to buy. Good for them, bad for us because they sell more than we do. The difference is called the trade deficit. It has been in their favor for years. The November 30, 2009, edition of Bloomberg News reported that President Obama's November visit to China did not produce any agreement on the currency issue. European Central Bank President Jean-Claude Trichet has also been calling for China to let its currency “float” to eliminate the currency imbalance, but without success. There are those in China who continue to ignore international intellectual property laws and trade agreements by hacking into U.S. computer systems, both public and private, and boldly manufacturing counterfeit American goods. Since China and the West are in a symbiotic trade relationship neither can afford to take too much from the other or both will suffer. The growth prospects for China are better than good. They shouldn't have to cheat to prosper.
Taxes
INCOME TAXES: With the “Bush Tax Cuts” set to expire in 2010 and federal spending as a percentage of GDP at the highest level in the last 60 years, the probability of higher tax rates is increasing, almost to the point of certainty. According to The Tax Foundation, (www.taxfoundation.org) the highest tax rate would have to increase to 95.2% for those earning $373,601 and over in order to erase the deficit. William Ahern, director of policy and communications at The Tax Foundation wrote in the October 2009 FISCAL FACT report No. 197…“fiscal year 2010, the federal government plans to spend $3.8 trillion dollars, the largest annual expenditure ever. On the reverse side, taxes will bring in about $2.3 trillion, so the federal government is creating a shortfall of approximately $1.5 trillion. That projected deficit will vary as the months pass, but it may well end up being even higher than the record-setting deficit in 2009 of $1.4 trillion. Those huge amounts translate into a federal government that will spend $33,000 on each household but that will raise only $19,000.” Keep in mind that these deficits are added to the already enormous national debt, which continues to cost us billions a week just to pay the interest to owners of these government bonds, both foreign and domestic.
For those in higher income tax brackets, the power of tax-free income is compelling. Municipal bonds and bond funds should be considered if you are interested in lowering your taxes on interest income. Tax-deferred fixed or variable annuities offer distinct tax advantages. Tax-deductible IRAs and other types of retirement plans should be funded to the fullest, in my opinion. Don't count on Uncle Sam. Remember, he's deep in debt. Shareholders: Don't file your taxes very early. Some companies may issue corrected 1099s.
ESTATE TAXES: Dec. 3, Bloomberg News - “The U.S. House of Representatives voted to prevent the federal estate tax from expiring on Dec. 31 and to permanently exempt couples' fortunes of up to $7 million. The House voted 225-200 to indefinitely extend the current tax, which imposes a top rate of 45 percent. 'We make the estate tax go away for 99.75 percent of the people in the country,' said North Dakota Democrat Earl Pomeroy, the main sponsor. Republicans who voted against the measure said they favored repealing the levy.” This epigram, often attributed to Otto von Bismark may apply to the workings of the U.S. House Committee on Ways and Means, they who write our tax legislation: “I have come to the conclusion that the making of laws is like the making of sausages - the less you know about the process the more you respect the result.”
Government
“The essence of Government is power; and power, lodged as it must be in human hands, will ever be liable to abuse.” - James Madison
Back to the sausage factory. Do you know how many laws have been passed by Congress in our short two hundred twenty years of nationhood? Neither do I. This would be a good study question for all Americans. When John Adams said that we should be “a nation of laws and not of men” I don't think he meant we should be a nation with more laws than men and women.
Federal Reserve Chairman Ben Bernanke was confirmed by the Senate for a second term on a 70-30 vote recently. The thirty who voted against confirmation should publish their reasons for doing so, entering them into the record for posterity, and for the voters back in their districts. I'm not convinced that many in the House or Senate understand economics and finance very well. Who was in the wings to replace Bernanke? Who is a better scholar of the Great Depression and would have been willing to take on the task? And, isn't the Federal Reserve supposed to be independent of party and politics? More questions for future study.
From the Federal Reserve January 27, 2010, news release: “Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating. Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls. Firms have brought inventory stocks into better alignment with sales. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.” We may be out of the recession, but it just doesn't feel like it yet.
Retirement
“Were we directed from Washington when to sow and when to reap, we should soon want bread.” - Thomas Jefferson
In an article entitled Retirement Benefits: What to Expect in 2010 in U.S. News and World Report by Emily Brandon, December 21, 2009, the author states that there will be no increase in Social Security payments this year. This bears repeating. I mentioned it in last quarter's letter. New enrollees in Medicare Part B will pay $110.50 per month, a 15% increase from 2009. Many will see an increase in Medicare Part D, the prescription drug benefit. The contribution ceiling for regular 401(k) plans will remain the same.
We've passed the tipping point. Unless America experiences a second Baby Boom, we, like Japan and most of Western Europe, will not be able to fund our citizens' retirements from public programs to the degree that we have in the past. This is why I encourage all of my clients to contribute as much as possible to retirement savings and investment plans. For those already retired, I encourage you to tell your family and friends who are still employed to start, continue and increase retirement savings.
Reading List:
Mark Levin's Liberty and Tyranny, published by Threshold Edition, NY. The title says it all. My opinion: Easy reading, respectable scholarship and reference sourcing.
Charles Mackay's Extraordinary Popular Delusions and the Madness of Crowds is available on Amazon and Barnes & Noble for about $5.00. My opinion: Must reading for those wishing to understand the financial bubbles of the past. The late Sir John Templeton often recommended this book to his investors and associates. Stay in touch with me. My goal is to help you achieve your financial goals.
Wishing you a happy, healthy and prosperous 2010,
Robert W. Brimmer, CFP™
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 here are the author's and do not reflect any opinion of National Securities Corporation, my Broker/Dealer, or any of its Affiliates. Bloomberg News, Dow Jones price history, U.S. Federal Reserve, The Tax Foundation, U.S. News and World Report and The Wall Street Journal were used as source material for this letter. Securities offered through National Securities Corporation, Member FINRA/SIPC. Investment Advisory Services offered through National Asset Management, Inc., an S.E.C. Registered Investment Adviser and affiliate of National Securities Corporation. Accounts are carried by National Financial Services, LLC, Member NYSE/SIPC, a Fidelity Investments® company.
BRIMMER FINANCIAL
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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.