My Comments and Opinions
Fourth Quarter, 2010
We could certainly slow the aging process down if it had to work its way through Congress. -Will Rogers
A REMINDER ABOUT EARLY TAX FILING:
If you plan to file your 2010 income taxes early and you hold assets in a brokerage account, please be advised that many companies have been late in filing their corporate taxes or have created “corrected 1099” reports in past years. This has created aggravation and extra expense for investors who filed early only to have to go back and amend their income tax returns to account for the revised data. Go to your accountants as early as possible, but wait until nearer the tax filing deadline to formally file with the I.R.S. Be sure to alert your accountant to this issue and take his or her advice.
THE ECONOMY
From John Mauldin's “OUTSIDE THE BOX” An article by Van Hoisington and Dr. Lacy Hunt entitled Growth Recession Continues January 17, 2011
“Factoring in a 4% Q4 growth rate, the U.S. economy expanded by 3% in real terms from the 4th quarter of 2009 through the 4th quarter of 2010. Despite this rise in GDP, the unemployment rate remained stubbornly high at 9.6% in the last quarter of 2010, only slightly lower than the 10% rate it averaged in the same quarter one year ago. Positive real GDP growth with high unemployment is the definition of a growth recession. An even slower growth rate of real GDP should be recorded over the next four quarters, suggesting the unemployment rate will be essentially unchanged a year from now. As we have noted previously, this modest expansion is due to the significant over-indebtedness of the U.S. economy.”
A REPORT FROM THE U.S. SMALL BUSINESS ADMIN. (www.sba.gov) Jan. 3, 2011
The Jobs Act supported more than $12 billion in SBA lending to small businesses in just three months. SBA Administrator Karen Mills announced that as of December 31, 2010 the agency had approved more than $10.3 billion in loan guarantees which supported more than $12 billion in lending to small businesses since President Obama signed the Small Business Jobs Act of 2010 on September 27. The Jobs Act included an extension of reduced fees and higher guarantee loan enhancements in the agency's two largest loan programs.
THE FLASH CRASH - Kara Scannell, The Wall Street Journal, October 1, 2010
“Federal regulators investigating the causes of the May 6 Flash Crash concluded a large trader's use of a computer trading system to sell futures contracts led to a rapid and sudden selling that triggered additional selloffs in an already unstable market. According to a joint report from the staffs of the Securities and Exchange Commission and Commodity Futures Trading Commission, the trader chose to use an algorithm to trade the E-mini futures contract, a contract that mimics trading in the S&P 500 stock index. The computer program executed the trade 'extremely rapidly in just 20 minutes,' according to the report.
“The report found that the trades were initially absorbed by high-frequency traders and others in the market, but soon liquidity dried up for that contract and elsewhere. The Wall Street Journal and other news organizations have identified the large trader as Waddell & Reed Financial. The report only identifies the trader as a large trader. Waddell has said it didn't intend to disrupt the market.”
The gist of this story is that there was a lot of up and down volatility on May 6 and trading volume was up in both the futures and equity markets. At 2:32 PM, Waddell & Reed scheduled the sale of 75,000 E-Mini contracts, worth about $4.1 billion, as a hedge against an equity position. It was the largest net change in holdings by any trader this year.
The algorithm, which is a mathematical tool used to solve complex problems, solved too many problems too fast and essentially drove the prices down to ridiculously low levels. Many trades were cancelled. This reminded me of October 19, 1987, a day that computer programs helped drive prices down by 22% before the markets closed at 4:00 PM. So it seems that this was just another End-of-the-World event that didn't cause the end of the world.
MAJOR DIFFERENCES BETWEEN THE GREAT DEPRESSION AND TODAY'S GREAT RECESSION
source --www.wealthvest.com
A person who was a child during the Great Depression of the 1930s would be in his or her nineties today. We Americans living in 2011 have no shared national experience of the depths and devastating human impact of the Great Depression. We might feel that this recession is extraordinary, but how does it compare to the singular catastrophic economic event of the last century?
There are many relevant parallels and lessons to be learned from the Great Depression and this Great Recession that can provide both a historical perspective and some policy insight. The stock market crash of 1929 marked the beginning of the Great Depression, whereas the collapse of Lehman Brothers in September 2008 was the beginning of the Great Recession which we are leaving behind as economic activity is gradually improving.
Both periods were marked by increased unemployment, frugality, and popular unrest. The scope of the economic crisis, however, is radically different. During the Great Depression the global market did not have the institutionalized structures necessary to keep the market bust from spreading into the general economy. Several well-intentioned but devastating moves by government only exacerbated the situation. Furthermore, the Great Depression was characterized by a severe double dip, whereas the current economic crisis has maintained a steady growth rate; current growth has slowed, but it has not stopped.
There are also significant differences in the levels of deficit spending, manufacturing capacity, and bank foreclosures. We have been in a slow growth economy for over a year now. It doesn't feel like a recovery, but in fact, it is. During the Great Depression there were over 9,000 bank failures (nearly half of all banks) from January, 1930 through March, 1933. During this Recession only 57 banks (about 0.6%) failed. In the early 1930s the unemployment rate was 25%. During the worst of this Recession about 10% of our work force was unemployed with another 6% to 7% only partially employed. From 1929 to 1933 the U.S. economy dropped by about 16%. From the second quarter of 2008 to the first quarter of 2009 the U.S. economy dropped by 3.3%. The biggest drop in the Dow Jones Industrial Average was 89.2% (Sept.3, 1929 - July 8, 1932). From Oct. 9, 2007 to March 9, 2009 the Dow dropped 53.8%. It's rallied dramatically since then.
Most states raised taxes and cut spending during the Depression. The recent Federal Stimulus Plan has helped states meet some of their obligations. In 1933 the Federal Reserve increased the money supply by 17%. From September, 2008 to May, 2009, the Fed increased the money supply by 125%. America and the rest of the world avoided another Depression this time. But the cost has been increased national debt. Should future tax receipts not balance future federal and state spending, I expect that our purchasing power will decline because more Dollars will be printed and each new Dollar will buy just a little less. -sources: FDIC, Federal Reserve, Commerce Department, Dow Jones, Christina Romer, Obama economic adviser: “Lessons from the Great Depression for Economic Recovery in 2009”
Let's assume that our national debt, now $14,000,000,000,000, give or take, doesn't change - doesn't go up or down - then what? Our tax rates could increase. The government may choose to inflate our way out of debt by printing more and more Dollars, making each new one worth just a little less. It's a way to pay off today's debt with tomorrow's cheaper currency. It wouldn't be the first time this technique has been used. “Many countries have tried this and they've all failed,” said Mark Zandi, chief economist at MoodysEconomy.com. It seems to me that we're looking at future tax increases and budget cuts at the municipal, state and federal levels sooner or later.
FROM AN ANONYMOUS SOURCE ON THE WORLD-WIDE WEB:
“The President recently ordered the cabinet to cut a whopping $100 million from the $3.5 trillion federal budget! I'm so impressed by this sacrifice that I have decided to do the same thing with my personal budget. I spend about $2000 a month on groceries, medicine, bills, etc., but it's time to get out the budget cutting ax, go line by line through my expenses, and go to work. I'm going to cut my spending at exactly the same ratio -1/35,000 of my total budget. After doing the math, it looks like instead of spending $2000 a month; I'm going to have to cut that number by six cents! Yes, I'm going to have to get by with $1999.94, but that's what sacrifice is all about. I'll just have to do without some things, that are, frankly, luxuries.”
WE'LL ALL NEED MORE MONEY
I believe that the cost of living will go up every year far into the future. Do you know how much more money you'll need as the years go by? A formal written financial plan can help you define your life goals, assess your current situation, find strengths and weaknesses in your finances and discover ways to help you achieve your dreams and goals.
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. Source material for this letter: Commerce Dept., FDIC, The Federal Reserve, Outside the Box by John Mauldin, Lessons from the Great Depression… by Christina Romer, MoodysEconomy.com, Ten Major Differences between the Great Depression and the Great Recession -www.wealthvest.com, Small Business Administration and The Wall Street Journal.
BRIMMER FINANCIAL
rbrimmer@nationalsecurities.com
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