My Comments and Opinions
Second Quarter, 2010
Here we are again, paying the price of admission to the thrilling stock market rollercoaster ride which we politely call
price volatility. During the second quarter of 2010 we experienced three months of course
correction. That's the euphemism for "it went down." From Dow 10927 on April 1, 2010 to Dow 9774 on June 30th,
this most frequently quoted index slipped 1153 points, about 10.5%.
Going back to the market low of March 9, 2009, the Dow Jones Industrial Index rose from 6547 to 11205 on April 23, 2010.
The Index then proceeded to slide down by about 13.5 % to 9686 on July 2, 2010. From this correction
low, the Dow has been moving ahead again, finishing at 10525 at the close of business on Monday, July 26, 2010, an increase
of about 8%. The all-time high for the Dow Jones 30 Industrial Index was reached on October 9, 2007, when it closed
the day at 14164. The Dow index must gain an additional 3639 points from July 26, 2010, to match the all-time high of
October, 2007. In other words, the market needs to increase by about 35% to top the old record.
Why does this up and down market pattern occur time and again? Is the market being manipulated by a cabal of cigar
smoking ka-billionaires in some penthouse high above Fifth Avenue? Well…no. There are far too many participants
in the markets for any small group to be able to control the short-term direction of stocks, bonds or any other large
class of assets for that matter. Some 90 million Americans own the debt and equity of publicly-traded companies, both
as individuals and through their IRAs, pensions and 401(k) plans. Millions of other people from around the world own
shares. We'd have to conjure up the specters from a Hollywood Horror Movie to materialize enough schemers and plotters
to organize a conspiracy powerful enough to affect the take-over of our financial markets.
So if we can't find a pack of marauding Freddie Krugers to blame, who's responsible for all the turmoil and pain the
financial crisis caused us? There's more than enough blame to go around. Too many of us bought more house,
car and vacations than we could afford. "We've met the enemy and he is us" - Pogo (1948-1975). The bad guys
weren't just nefarious deceivers and hucksters of bum mortgage deals. I believe the primary perpetrators were
lawmakers. In my opinion, the repeal in 1999 of The Banking Act of 1933, otherwise know as the Glass-Steagall Act,
after its Congressional sponsors, Carter Glass and Henry Steagall, exacerbated the Financial Crisis of 2007-2010.
The original 1933 law divided the banking industry into two parts:
Traditional Lending Institutions (the commercial banks) and Investment Banks (the Lehman Brothers and Merrill Lynch-type
firms that offered securities like stocks and bonds to the public). The repeal of Glass-Steagall brought the securities
industry back to the days before the Great Depression. What happened after repeal of the old law? Stock brokerage
firms got into traditional banking. They bundled up risky mortgages and sold them as securities…the ones that
got us into all the trouble. At the same time traditional banks got into the stock market business. The resulting
chaos had to be sorted out. Imagine a courtroom drama. The Law of Unintended Consequences was applied
during the trial. Both the guilty and the innocent paid dearly.
What was that thing called the Flash Crash of May 6, 2010, the day the Dow Jones dropped about
1,000 points in some fifteen minutes only to sharply turn back up a few minutes later? In the May 28th edition of the
Wall Street Journal the question, 'Who did this?' was asked. As of the date I'm writing to you I have yet to see a full
explanation of this anomaly. I suspect it was some kind of computer-driven event, not unlike the one-day 22% market
decline on October 19, 1987. Computers can buy and sell many more shares in a few seconds than people will ever be able
to trade. People, however, had to spend hours unwinding and cancelling the many trades that occurred during the flash
crash. It wasn't a vast socialist conspiracy to destroy America. Fat-fingered electronic poltergeists maybe?
With the Dow Jones in the 10,000 area, a one hundred-point move is only a 1% move up or down. On May 27th the
Dow closed up almost 3% for the day. We all know that markets, all markets, have their up cycles and down
cycles. Continuous live TV and radio stock market, economic and political reports can promote emotions of fear or
greed. They certainly don't create feelings of complacency. I monitor the TV investment shows throughout the day
for any news bulletins that might be important. For the most part these shows are just noise and entertainment.
They remind me of barkers at the carnival. Some of our most famous investors, the Buffets, Templetons, Lynches, etc.,
were the tortoises who quietly and calmly won their races long after the hares quit or changed course.
30,543 Reasons Spending Is Out of Control
"If we can prevent the government from wasting the labors of the people, under the pretence of taking care of them,
they must become happy."
Brian Riedl, lead budget analyst for the The Heritage Foundation in Washington, D.C. reported
on June 1, 2010, that "Our federal government will spend $30,543 per household in 2010—an increase of $5,000 per
household in just two years. Federal spending and deficits are increasing at levels unseen since World War II. And
though President Obama has done little to quell the spending surge—in fact, his budget only accelerates the pace of
spending – excessive government spending did not begin with him.
"Since 2000, spending has grown across the board over the last decade…entitlement spending on programs like Medicare,
Medicaid and Social Security reached a record 14 percent of GDP; Discretionary spending has expanded 79 percent faster than
inflation as a result of large defense and domestic spending hikes; Anti-poverty spending increased 89 percent faster than
inflation; K–12 education spending rose 219 percent; Veterans spending grew 107 percent; and Medicare jumped 81 percent.
Simply put all parts of government are growing. More than 41 cents of every dollar Washington spends in 2010 will be
borrowed. This year alone, Washington is projected to spend $3,618 billion, tax $2,118 billion out of the economy, and run
a $1,500 billion deficit. The President's budget plan shows annual deficits averaging just under $1,000 billion for the next
decade—a level of borrowing that would cause the national debt to double."
Though the big spenders in Congress maintain that rising deficits are a result of tax cuts, Riedl asserts that "Rising
spending—not low revenues—is driving the long-term budget deficits. By 2020, spending is projected to be 6.2% of
GDP above the historical average, while projected 2020 revenues are 0.2% of GDP above the historical average. Thus, the
entire expanded budget deficit will be caused by rising spending, rather than by falling revenues—even if the 2001 and
2003 tax cuts are extended. There are steps lawmakers can take to rein in spending and the federal deficit. For example,
returning to 1980's and 1990's spending levels of $21,000 per household (adjusted for inflation), would balance the budget by
2012 without any tax hikes. Alternatively, returning to the pre-recession $24,800 per household level (adjusted for inflation)
could likely balance the budget by 2019 without any tax hikes. Spending can be reduced by implementing spending caps and
deficit ceilings—and actually enforcing them. (Congress has a habit of announcing new spending controls, like the left's
vaunted PAYGO rule, but then waiving them at every opportunity.) This would force our elected leaders to prioritize and enact
serious reforms to curb runaway spending."
It only takes a generation or two of neglect to forget the lessons of history. During the past 40 to 50 years America has
accumulated unfunded mandates that, by some estimates, exceed $100 trillion dollars. These entitlements
include Social Security, Medicare and Medicaid. If there are 100 million families in America, each family's share of this
future debt is about $1,000,000. My mother had a saying about the takers, "He thinks the world owes him a living." Well, as
it turns out, the world really doesn't owe any of us a living. We have, however, created a social safety net which has started
to tear. Unless the net is strengthened or the stresses on the net are reduced, there will come a day that one or more things
will happen: Hyper-inflation, with a loss of purchasing power and massive printing of fiat currency to pay off the old debt with
cheaper money; Loss of our national AAA credit rating resulting in much higher interest rates and higher inflation; Reduction
in promised benefits.
Christian E. Weller, reporting in the July 23, 2010 edition of Center for American Progress noted:
"The private sector is expanding. It added almost 600,000 jobs in the first six months of 2010 compared to regular losses of more
than 700,000 jobs per month in early 2009 at the height of the recession. The U.S. trade deficit is growing again because imports
are increasing faster than exports, thereby reducing current economic growth. State and local governments are also struggling
with their troubled finances, laying-off workers and thus weakening the accelerating jobs growth. The unemployed are out of a job
for long periods. In June 2010, 6.8 million people had been looking for a job for 27 weeks or more. The average length of
unemployment that month was 35.2 weeks - a record high since the government collected these data after 1948 and 45.5 percent of
the unemployed were out of a job for 27 weeks or more."
Both "think tanks" Heritage (conservative) and Center for American Progress (progressive) tell a tale of recent difficulty for
America…the longest recession in memory for most of us, very high underemployment and unemployment, stagnation and not a lot
to cheer about. The on-line encyclopedia, Wikipedia, has an article about the estimated number of recessions in America since 1790.
It's as many as 47. That means during the 220 years since 1790 America has experienced possibly 47 periods of shrinking economic
growth – bad times. That's one every 4.7 years. Ugh.
Let's just assume that the 4.7 year cycles were to continue. I don't think it will for a lot of reasons, but let's just assume it
does. How should we prepare? Remember the Bible story of Joseph in Egypt? Joseph advised Pharaoh to prepare for bad times by
putting up stores of grain during seven good years. When the famine hit, the people had food for seven bad years. Joseph is an
inspiration for financial planners. Too many of us have over-spent and under-saved for years. We'll get out of this mess as we
always have as long as we maintain our freedoms. If you have a plan to help you fulfill your financial goals –
congratulations! You're on your way. If you need or someone who know needs help planning for a more secure financial future, call
me. I work with people who need and want help with some or all of their financial planning.
I didn't write about the many early signs of economic growth and corporate profit this time. More about the "green shoots growing" later.
Robert W. Brimmer, CFP™
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. The price history of the Dow Jones Industrial 30 Index (in the public domain), The
Wall Street Journal, Heritage Foundation, and The Center for American Progress were used as source material for this letter.
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