Financial Stability of the U.S. Dollar

Could the U.S. Government limit cash withdrawals?

Question: Sen. Ron Paul is not the only person who speaks of a financial apocalypse and others have written books too. From what you know or foresee, is there any possible way the U.S. government (with the way U.S. banks are set up)…could possibly limit cash withdrawals? Also, if the U.S. Dollar is devalued…By what amount and what affect would this have on U.S. consumer buying items in U.S.A.?

Answer: This is a story that apparently is not going away soon. Former Senator Ron Paul is particularly worried about the $18 trillion that the U.S. owes and that our biggest creditor is China. To repay the debt, every man, woman and child in America would need to fork over about $57,000! Clearly that’s not going to happen and so far our leaders (President, House and Senate members- Republicans and Democrats alike) are not only unwilling to pass debt reduction programs, but by their policies, they continue to grow the debt. Yes, at some point this chicken is coming home to roost and it may get ugly…but, after observing our economy at work for over forty years, I’ve concluded that it is much more elastic than most people think. And while we witnessed the citizens of Greece recently standing in long lines at the bank with withdrawals limited to $300 per day, I can’t imagine that happening here in America. Let’s not lose sight of the fact that while Greece is a country, its economy is about the size of Alabama’s economy. Likewise, it’s highly unlikely we’ll see a ‘devaluation’ of our currency although the value of the Dollar rises and falls versus other world currencies based on global financial and economic conditions. If the U.S. Dollar did ‘collapse’, I suspect what we’d see would be sharply inflated prices of goods sold here. Again, this is a highly unlikely scenario.

5 Predictions for the New Congress

In the aftermath of the elections, our nation faces a number of unprecedented challenges both immediately and in the near future. Here’s my best guess at how they’ll play out over the next few weeks and months ahead:
1.       Fiscal cliff – part 1: Automatic spending cuts. As part of the 2011 debt ceiling compromise, members of Congress agreed to across-the-board automatic spending cuts beginning January 1 if the ‘super committee’ could not agree on a detailed spending cut plan. This would mean cuts for an estimated 1,000 government programs including deep cuts in both defense and Medicare. This is not going to happen. Neither is Congress as a whole going to resolve program-by-program budget cuts the super committee failed to do before this year ends. Over the past four years members of Congress have proven they are adept at the game of ‘kick the can down the road’ and I predict that their first piece of ‘compromise’ legislation since President Obama was re-elected will be to vote to ‘postpone’ the automatic spending cuts until sometime next year.
2.       Fiscal cliff – part 2: Higher taxes. The Bush tax cuts are set to expire December 31st resulting in significantly higher income tax rates for both middle-income and higher-income taxpayers. This is going to be a game of ‘Bluff’ between the House and Senate. I suspect the U.S. House of Representatives to make the first move by passing legislation extending the current Bush tax cuts through 2013. Their explanation will be to, “Give Congress more time to work out a compromise”. The Senate will respond with the Obama inspired legislation offering to extend the Bush tax cuts for all but the wealthiest Americans…those earning more than $200,000 ($250,000 for couples) per year. We’ll have to wait to see who blinks first. My bet is that the Bush tax cuts will expire due to no action by Congress before year-end with the Republican controlled House and the Democratic controlled Senate blaming each other while the American taxpayer is left holding the bag. As part of this, I don’t expect Congress to renew the payroll tax cuts for the 160 million wage-earners.
3.       Death taxes. As part of the expiration of the Bush tax cuts, the amount of wealth exempt from death taxes will drop from $5,120,000 this year to $1,000,000 next year. In addition, the tax rate on assets above those amounts will rise from 35% this year to as much as 55% next year. This means that many middle-income taxpayers who own their home and have enough life insurance to protect their family will, for the first time, face death taxes. Congress will not resolve this before the end of the year but I do expect that sometime during 2013, Congress will raise the exempt amount from $1,000,000 to $3,500,000 or higher and make the new law both permanent and retroactive to January 1, 2013. This is because President Obama had offered this as part of a budget compromise before the elections. A simple alternative would be to make the current law permanent thereby setting the exemption amount at $5,000,000 with automatic cost-of-living adjustments.
4.       Deficit. Everyone is concerned about the deficit. Unfortunately, both Republicans and Democrats lack the political will to enact meaningful legislation that will significantly address this growing problem. We’ll hear lots of conversation from both sides of the aisle about what must be done but in the end I expect to see the deficit grow by more than $1 trillion in 2013.
5.       Social Security and Medicare. It’s no secret that both of these programs are on a path of self-destruction in their current form. Something must give…but don’t expect a ‘fix’ over the next four years. First, the Republicans are scared to death that they’ll lose control of the House in 2014 and that Obama will be free to rule over all of Congress in his last two years. The Democrats are still stinging from their losses in 2010 and will avoid tackling the toughest issues we face. Again, expect a lot of conversation but little action.
What does all of this mean for investors? In a word…well two words, continued uncertainty. The markets hate uncertainty as do business owners so the markets will remain volatile and business owners will remain cautious. However, I don’t believe the economy will slip into another recession. The economy should continue its slow recovery including a slow recovery in the job market. Corporate America continues to strengthen their balance sheets by storing cash, reducing debt and closely monitoring their expenses. The stock market should see volatile but rising prices over the next four years. There will be upward pressure on interest rates and that spells trouble for the once-shining bond market.

 

Stocks Rise For A Third Week – January 2012

Up to date in less than 2 minutes:
Last week U.S. stocks rose for a third week, the longest winning streak since October, as better-than-estimated economic data and company earnings boosted confidence in American growth. For the week, the Dow, S&P 500, NASDAQ, and Russell 2000 rose +2.4%, +2.0%, +2.8%, and +2.7%, respectively.

 

Equity Performance Table
Last Week
Year to Date
Last 52 Weeks
Dow Jones Industrial
+2.4%
+4.1%
+7.1%
S&P 500 (Large Caps)
+2.0%
+4.6%
+2.5%
NASDAQ (Technology)
+2.8%
+7.0%
+3.6%
Russell 2000 (Small Caps)
+2.7%
+5.9%
+1.5%
Dow Jones U.S. Total Stock Market Index
+2.1%
+5.0%
+1.9%
Dow Jones Global Ex-U.S. Index (International)
+4.0%
+5.4%
-12.4%

 

Interest Rates
Prime Lending Rate
3.25%
Interest Rate Bias
Short-Term = Neutral; Intermediate Term = Neutral; Long-Term = Neutral
90 T-bill Rate
0.04%
90 Day LIBOR
0.56%
TED Spread
0.52%
30-Year Mortgage Rate
3.95%
15-Year Mortgage Rate
3.27%
5-Year Adjustable Mortgage Rate
2.90%
30-Year Treasury Yield
3.10%
10-Year Treasury Yield
2.03%
5-Year Treasury Yield
0.89%
2-Year Treasury Yield
0.24%

 

Notable Recent Dividend Increases
Lockheed Martin (“LMT”)
33.3%
Home Depot (“HD”)
16.0%
Emerson Electric (“EMR”)
15.9%
Union Pacific Corp (“UNP”)
25.0%
McDonalds Corp (“MCD”)
14.8%
 
 
 
Now, all the details……………………
 
Last week, the S&P 500 advanced +2% to 1,315.38. The S&P 500 has gained +4.6% in 2012, the best start to a year since 1997.  The Dow gained 298.42 points, or +2.4%, to 12,720.48, reaching the highest level since July 21st. The S&P 500 rose all four days U.S. exchanges were open last week as data bolstered confidence in the American economy. Claims for jobless benefits dropped to the lowest level since 2008 and confidence among homebuilders topped forecasts. “The domestic economy is strong and that’s helped the stock market,” Mark Bronzo, who helps manage $23.4 billion at Security Global Investors in Irvington, New York, said in a Bloomberg telephone interview.  “The market’s done pretty well in the face of some good earnings news and it seems to be overcoming some of the fears around Europe.”
Technology and energy companies led rallies by nine out of 10 S&P 500 Index groups, climbing more than +2.7%.  Sears Holdings Corp. (“SHLD”) added +46% amid speculation it may go private. Bank of America Corp. (“BAC”) led Dow Jones Industrial Average gains after posting a profit. International Business Machines Corp. (“IBM”) increased +5.2% after forecasting earnings that beat analysts’ estimates.
Companies from Goldman Sachs Group Inc. (“GS”) to Union Pacific
Corp. (“UNP”) and EBay Inc. (“EBAY”) topped analysts’ income projections.  S&P 500 companies, which beat profit estimates in the previous 11 quarters, will report a +3.4% increase in per-share earnings during the September-December period, analysts’ forecasts compiled by Bloomberg show.  Of the 51 companies in the S&P 500 that reported results since January 9th, 65% posted per-share earnings that beat projections, Bloomberg data show.
Google Inc. (“GOOG”), owner of the most popular Internet search engine, slumped -6.2% to $585.99 as fourth-quarter revenue and profit missed estimates. Chief Executive Officer Larry Page is moving into new markets to ignite growth outside Google’s traditional search-based business.  That effort contributed to an -8% drop in the average price Google gets when users click an ad, because it charges less for ads on mobile devices and in emerging markets, said Herman Leung, an analyst at Susquehanna Financial Group.
Carnival Corp. (“CCL”) tumbled -7.9% to $31.56.  The company owns the Costa Concordia cruise ship that ran aground off the coast of Italy last week, killing at least 11 people.  Carnival halted advertising for its Carnival Cruise Lines and announced a review of safety procedures in the aftermath of the accident.
Last week, the Dow Jones Global Ex-U.S. Index (broad international index) rose +4.0%. The Americas were up +2.3% with Brazil up +5.4%, Canada up +1.4%, and Mexico up +2.3%. Europe was up +2.7% with Germany up +4.3%, France up +3.9%, and Spain up +1.3%. Asia-Pacific was up +3.1% with Australia up +1.0%, China up +3.3%, Hong Kong up +4.7%, India up +3.6%, Japan up +3.1%, and Taiwan up +0.7%.
Treasuries dropped in price with the 10 year yield rising on the week to 2.03% from 1.86% in the week earlier.
The Baltic Dry Index, which tracks transport costs on international trade routes and may be a good leading indicator of economic activity, ended the week at 862, down from the week earlier closing level of 1,053. The index reached a high of 11,793 on May 20, 2008 and a low of 663 on December 5, 2008. The index last peaked at 4,661 set on November 11, 2009.
The TED spread measuring the difference between LIBOR and Treasury bill rates, which rose as high as 464 basis points during the liquidity crisis of 2008, is currently in more of a normal range of 52 basis points, but has increased as of late due to Euro bank concerns. The TED spread is a gauge of the willingness of banks to lend to one another. The lower the TED spread the more willing banks are to lend with each other. The TED spread fluctuates over time but generally has remained within the range of 10 and 50 bps (0.1% and 0.5%) except in times of financial crisis. A rising TED spread often presages a downturn in the U.S. stock market, as it indicates that liquidity is being withdrawn.
Last week, oil dropped -0.2% and closed at $98.46 per barrel. Year to date, oil is down -0.4%. The average price of unleaded gasoline dropped -0.1% last week to end at $3.383 per gallon per January 22nd data provided by AAA. Year to date, unleaded gasoline is up +3.2%. Natural gas was down -12.3% last week and closed at $2.343/MMBtu. Year to date, natural gas is down -21.6%.
Last week, gold rose +2.0% closing at $1,663.70 per troy ounce. Year to date, gold is up +6.3%. Last week the dollar was down -1.6% as measured by the U.S. Dollar Index with that index closing at 80.223. Year to date, the U.S. Dollar is up +0.1% as measured by the Dollar Index. Last week the Euro was up +0.9% against the U.S. dollar closing at $1.2909/Euro. Year to date, the Euro is down -0.2% against the U.S. Dollar.
Look for a slew of earnings in the coming week from the likes of McDonald’s (“MCD”), Regions Financial (“RF”), Kimberly Clark (“KMB”), Apple (“AAPL”), United Technologies (“UTX”), and Lockheed Martin (“LMT”). Look for economic reports this week on 4th quarter 2011 GDP, housing prices, durable goods orders, Fed rate decision (expected no change here), new home sales, and weekly jobless claims data.
Sources: Bloomberg, The Wall Street Journal, Barron’s, The New York Times, ValueLine.

Economic Predictions for 2012

This past year included a lot of excitement but not much progress from an economic or stock market perspective. Extraordinary events included the near shut-down of our government; the downgrading of U.S. treasuries from AAA status; the near default of Greece; as well as a highly volatile stock market that could rise or fall several hundred points a day. In the end our economy showed only marginal improvement and the stock market, as measured by the S&P 500 Index, had a 0% return.

So what’s ahead for 2012 and how should you position your portfolio to produce the best results? This is the time of year when market analysts and economists make their predictions for the year ahead. A few will gain ‘fame’ for their uncanny accuracy but the truth is that no one knows or can predict the future. At best we make educated guesses. Think of it as a target being laid on the ground 200 yards away and then 10,000 arrows shot up in the air in the general direction of the target….one or two may very well hit the bulls-eye but it would be a mistake to declare the flinger of that arrow as the greatest archer of our time. Still it’s a lot of fun to make predictions if only to allow your detractors the opportunity to say, “I told you so!” Here are my predictions for 2012:
Stock & Bond Market
·        The stock market will rise by double digits. Publicly traded corporations continue to deliver strong earnings and I expect those earnings to rise 10% or more in 2012. Stock prices should follow. Stock prices did not follow earnings this past year but I believe the reason was that events in the U.S. and Europe continued to scare investors away from the stock market.
·        U.S. Blue Chip Dividend-Paying stocks will continue to be the ‘sweet spot’ of the stock market. All last year I touted these stocks citing both the quality of their yields and the Baby Boomer retirement dynamics. This turned out to be the bright spot for the stock market last year with returns of 8%-12%. I expect this trend to continue in 2012.
·        Little-to-no opportunity in bonds. Bonds have been on a decade-long bull market run. With interest rates hovering near historical lows, I believe there is little opportunity for returns in bonds, CDs or money market accounts. There is a greater risk that interest rates will begin to rise sometime this year, causing bond values to fall. Having said this, some allocation to bonds in your portfolio is a prudent strategy. If there is a big jolt in the stock market, your bonds will tend to help counteract the negative volatility.
Interest Rates
·        Interest rates on bonds, CDs and Money Market accounts will remain low. The 10-year treasury is yielding less than 2% while the 30-year treasury is yielding 3%. 5-year CDs are yielding about 2% while most money market accounts are yielding less than 1%. The low interest rate trend will continue throughout 2012, however, at some point, interest rates will begin to rise…maybe this year or next.
·        Mortgage rates will remain low. Currently mortgage rates are hovering between 3.25% and 3.75% depending on your credit score and the term of the mortgage you choose. Mortgage rates will remain low but these rates could well mark the bottom.
U.S. Economy
            Our economy will continue to improve throughout 2012 but at a very slow pace. Inflation will rise but not at an alarming rate. The housing market is in a five to ten year workout cycle but I expect we have seen the bottom of the housing market and it will continue to improve throughout 2012. Expect the government to intervene with some type of support program…perhaps a rental program for foreclosed mortgages owned by Fanny Mae and Freddie Mac. The unemployment numbers will improve but overall unemployment will remain above 8%.
What should you do to position yourself for financial success in 2012?
·        Review your current investment allocation and decide if you are willing to increase your stock allocation. If you are retired or near retirement, be sure to maintain a minimum of three to five years’ worth of living expenses in your fixed income portfolio (bonds, CDs, and money market accounts). Review your stock strategy and consider adding blue chip dividend-paying stocks. You’ll receive nice comparative yields with upside opportunity.
·        Compare your mortgage rate to current rates. Would you benefit from refinancing? It’s still a great time to buy a home. Consider whether this year would be a good time to downsize.
·        Pay down debt. If you have debts with relatively high interest rates, consider using any cash resources to pay down your most expensive debts.

Stocks Drop, Europe Continues to be Drag

Up to date in less than 2 minutes:
Last week U.S. stocks fell as European leaders struggled to solve the region’s debt crisis and the Federal Reserve refrained from additional stimulus. For the week, the Dow, S&P 500, NASDAQ, and Russell 2000 all dropped -2.6%, -2.8%, -3.5%, and -3.1%, respectively.

 

 

Equity Performance Table
Last Week
Year to Date
Last 52 Weeks
Dow Jones Industrial
-2.6%
+2.5%
+3.3%
S&P 500 (Large Caps)
-2.8%
-3.0%
-1.9%
NASDAQ (Technology)
-3.5%
-3.7%
-3.3%
Russell 2000 (Small Caps)
-3.1%
-7.9%
-7.4%
International Stocks (EAFE)
-4.0%
-17.3%
-15.5%
Dow Jones Total Stock Market (Broad Market)
-2.9%
-4.2%
-3.1%

 

 

Interest Rates
Prime Lending Rate
3.25%
Interest Rate Bias
Short-Term = Neutral; Intermediate Term = Neutral; Long-Term = Neutral
90 T-bill Rate
0.00%
90 Day LIBOR
0.57%
TED Spread
0.57%
30-Year Mortgage Rate
3.92%
15-Year Mortgage Rate
3.27%
5-Year Adjustable Mortgage Rate
2.84%
30-Year Treasury Yield
2.85%
10-Year Treasury Yield
1.85%
5-Year Treasury Yield
0.80%
2-Year Treasury Yield
0.22%

 

 

Notable Dividend Increases – 2011
Lockheed Martin (“LMT”)
33.3%
NextEra Energy (“NEE”)
10.0%
United Technologies (“UTX”)
12.9%
Proctor & Gamble (“PG”)
9.0%
Abbott Labs (“ABT”)
9.1%
Home Depot (“HD”)
16.0%
Clorox (“CLX”)
9.0%
Colgate Palmolive (“CL”)
9.4%
Chevron Corp (“CVX”)
8.3%
Emerson Electric (“EMR”)
15.9%
General Mills (“GIS”)
8.9%
International Business Machines (“IBM”)
15.4%
Union Pacific Corp (“UNP”)
25.0%
Intel Corp (“INTC”)
33.0%
McDonalds Corp (“MCD”)
14.8%
Kimberly Clark (“KMB”)
6.1%

 

 
Now, all the details……………………
Last week, the S&P 500 fell -2.8% to 1,219.66, breaking a two-week streak of gains.  The Dow Jones Industrial Average sank 317.87 points, or -2.6%, to 11,866.39. “The market continues to be driven by headline stories about Europe, although the economic news has been more positive with respect to the U.S.,” John Carey, a Boston-based money manager at Pioneer Investments, said in a Bloomberg telephone interview. The firm oversees about $220 billion.  “On alternate days, people are either paying attention to those improving fundamentals or worrying about what’s going on in Europe.”
Stocks slumped on December 12th as Moody’s Investors Service said a European Union summit failed to produce “decisive policy measures” and Fitch Ratings said a comprehensive solution has not yet been offered.  The S&P 500 rebounded from a three-day slump on December 15th after Labor Department figures showed initial jobless claims fell by 19,000 to 366,000 in the week ended December 10th, the fewest since May 2008, and two reports showed manufacturing in the New York and Philadelphia regions expanded more than forecast in December.
Energy producers posted the biggest declines last week as a group, falling -4.9% as oil posted the biggest weekly loss since September.
Intel (“INTC”) tumbled -7.1% to $23.23 last week, pacing declines with technology companies which had the second-biggest decline as a group in the S&P 500.  The world’s largest maker of semiconductors cut its forecast for fourth-quarter revenue, saying supply shortages for hard drives are prompting computer producers to cut orders for other components.
First Solar Inc. (“FSLR”), the world’s largest maker of thin-film solar panels, had the biggest decline in the S&P 500, falling -30% to $31.91.  The company reduced profit estimates for this year and next and said it will cut about 100 jobs as it closes a California research center.
The MSCI EAFE Index (broad developed international index) dropped -4.0% last week. The Americas dropped -3.2% with Brazil down -3.7%, Mexico down -3.2%, and Canada down -3.3%. Europe dropped -2.8% with Germany down -4.8%.  Asia-Pacific dropped -2.4% with Australia down -1.0%, China down -3.9%, Hong Kong down -1.6%, India down -4.5%, Taiwan down -1.6%, and Japan down -1.6%.
Treasuries rose in price with the 10 year yield dropping to 1.85% from 2.06% in the week earlier.
The Baltic Dry Index, which tracks transport costs on international trade routes and may be a good leading indicator of economic activity, ended the week at 1,888, down from the prior week’s level of 1,922. The index reached a high of 11,793 on May 20, 2008 and a low of 663 on December 5, 2008. The index last peaked at 4,661 set on November 11, 2009.
The TED spread measuring the difference between LIBOR and Treasury bill rates, which rose as high as 464 basis points during the liquidity crisis of 2008, is currently in more of a normal range of 57 basis points, but has increased as of late due to Euro bank concerns. The TED spread is a gauge of the willingness of banks to lend to one another. The lower the TED spread the more willing banks are to lend with each other. The TED spread fluctuates over time but generally has remained within the range of 10 and 50 bps (0.1% and 0.5%) except in times of financial crisis. A rising TED spread often presages a downturn in the U.S. stock market, as it indicates that liquidity is being withdrawn.
Last week, oil was down -5.9% and closed at $93.53 per barrel. Year-to-date oil is up +2.4%. The average price of unleaded gasoline dropped -1.6% last week to end at $3.221 per gallon per December 18th data provided by AAA. Year-to-date, unleaded gasoline is up +4.8%. Natural gas was down -5.7% last week and closed at $3.127/MMBtu. Year-to-date, natural gas is down -29.0%.
Last week, gold dropped -6.8% closing at $1,595.60 per troy ounce. Year-to-date, gold is up +12.3%. The dollar was up +2.1% as measured by the U.S. Dollar Index with that index closing at 80.256. Year-to-date, the U.S. Dollar is up +1.6% as measured by the Dollar Index. The Euro was down -0.6% against the U.S. dollar closing at $1.3035/Euro. Year-to-date, the Euro is down -2.5% against the U.S. Dollar.
In the coming week, look for corporate earnings from companies such as General Mills (“GIS”), Oracle Corp (“ORCL”), CarMax (“KMX”), and Bed Bath & Beyond (“BBBY”). Look for economic reports this week on housing starts, home sales, durable goods orders, 3rd Quarter GDP, personal income, personal spending, and weekly jobless claims data.
Sources: Bloomberg, The Wall Street Journal, Barron’s, The New York Times, ValueLine.

 

Stocks Rebound to Best Week Since March 2009

Up to date in less than 2 minutes:
Last week U.S. stocks rose, sending the Standard & Poor’s 500 Index to its biggest weekly rally since March 2009, after central banks took action to ease Europe’s debt crisis and American Thanksgiving retail sales set a record. For the week, the Dow, S&P 500, NASDAQ, and Russell 2000 all rose +7.0%, +7.4%, +7.6%, and +10.3%, respectively.

 

Equity Performance Table
Last Week
Year to Date
Last 52 Weeks
Dow Jones Industrial
+7.0%
+3.8%
+5.6%
S&P 500 (Large Caps)
+7.4%
-1.1%
+1.6%
NASDAQ (Technology)
+7.6%
-1.0%
+1.4%
Russell 2000 (Small Caps)
+10.3%
-6.2%
-2.8%
International Stocks (EAFE)
+9.1%
-13.1%
-10.9%
Dow Jones Total Stock Market (Broad Market)
+7.6%
-2.1%
+0.6%

 

 

Interest Rates
Prime Lending Rate
3.25%
Interest Rate Bias
Short-Term = Neutral; Intermediate Term = Neutral; Long-Term = Neutral
90 T-bill Rate
0.00%
90 Day LIBOR
0.53%
TED Spread
0.53%
30-Year Mortgage Rate
4.00%
15-Year Mortgage Rate
3.35%
5-Year Adjustable Mortgage Rate
2.94%
30-Year Treasury Yield
3.03%
10-Year Treasury Yield
2.03%
5-Year Treasury Yield
0.91%
2-Year Treasury Yield
0.25%

 

 

Notable Dividend Increases – 2011
Lockheed Martin (“LMT”)
33.3%
NextEra Energy (“NEE”)
10.0%
United Technologies (“UTX”)
12.9%
Proctor & Gamble (“PG”)
9.0%
Abbott Labs (“ABT”)
9.1%
Home Depot (“HD”)
16.0%
Clorox (“CLX”)
9.0%
Colgate Palmolive (“CL”)
9.4%
Chevron Corp (“CVX”)
8.3%
Emerson Electric (“EMR”)
15.9%
General Mills (“GIS”)
8.9%
International Business Machines (“IBM”)
15.4%
Union Pacific Corp (“UNP”)
25.0%
Intel Corp (“INTC”)
33.0%
McDonalds Corp (“MCD”)
14.8%
Kimberly Clark (“KMB”)
6.1%

 

 
Now, all the details……………………
Last week, the S&P 500 climbed +7.4% to 1,244.28 snapping a two-week decline to trim its 2011 loss to -1.1%.  The Dow added 787.64 points, or +7.0%, to 12,019.42 and is up +3.8% for the year. “This week’s move was sparked by the global coordinated efforts by central banks and the greater clarity provided by European policy makers on plans to stabilize the debt situation,” Chad Morganlander, a Florham Park, New Jersey-based money manager at Stifel Nicolaus & Co., which oversees more than $116 billion in client assets, said in a Bloomberg telephone interview. “U.S. retail sales reports provided greater confirmation of stability within the U.S. economy.”
The S&P 500 surged after the Federal Reserve and five other central banks lowered the cost of dollar funding and China cut the proportion that banks need to hold as reserve capital. Germany and France are leading a push for tougher enforcement of euro-area budget rules to counter the debt crisis now in its third year.
The S&P 500 stock index has rebounded more than +13% from its 2011 low on October 3rd.  Improving U.S. economic data has helped alleviate concern that the world’s largest economy will relapse into a recession as Europe’s debt crisis threatens to derail the recovery. U.S. retail sales during the Thanksgiving weekend increased +16% to $52.4 billion, the National Retail Federation said, citing a survey conducted by BIGresearch.  The average shopper spent $398.62, up from $365.34 a year earlier.  Another report last week showed that consumer confidence snapped back more than forecast in November as Americans turned less pessimistic on the outlook for jobs.
Jobs data released by the Labor Department last week showed that payrolls climbed 120,000, with more than half the hiring coming from retailers and temporary help agencies, after a revised 100,000 rise in October that was more than initially estimated.  The median estimate in a Bloomberg News survey called for a gain of 125,000.  The jobless rate declined to 8.6%, the lowest since March 2009, from 9%.
“Except for Europe, the rest of the world economy is doing pretty well,” the hedge-fund manager said December 2nd during an interview on Bloomberg Radio’s “Surveillance” with Tom Keene and Ken Prewitt.  “There’s too much bearishness, and equities — particularly U.S. equities and emerging-market equities – are very cheap relative to fixed income, Treasury bonds, high yield, and other financial assets.”
All 10 groups in the S&P 500 rose last week, led by a +10% rally in energy producers as crude oil had its first gain in three weeks.  The Morgan Stanley Cyclical Index surged +9.6% amid easing concern about global economic growth. Financial shares rose +9.5%, the second-most among the 10 industries in the S&P 500.  A gauge of European banking shares climbed +14%, the second-best performance among 19 groups in the benchmark Stoxx Europe 600 Index.
The MSCI EAFE Index (broad developed international index) increased +9.1% last week. The Americas rose +7.8% with Brazil up +5.5%, Mexico up +6.3%, and Canada up +5.4%. Europe rose +8.7% with Germany up +10.7%. Asia-Pacific rose +7.5% with Australia up +7.6%, China down -0.8%, Hong Kong up +7.6%, India up +7.3%, Taiwan up +5.3%, and Japan up +5.9%.
Treasuries dropped in price with the 10 year yield rising to 2.03% from 1.97% in the week earlier.
The Baltic Dry Index, which tracks transport costs on international trade routes and may be a good leading indicator of economic activity, ended the week at 1,866, up from the prior week’s level of 1,807. The index reached a high of 11,793 on May 20, 2008 and a low of 663 on December 5, 2008. The index last peaked at 4,661 set on November 11, 2009.
The TED spread measuring the difference between LIBOR and Treasury bill rates, which rose as high as 464 basis points during the liquidity crisis of 2008, is currently in more of a normal range of 53 basis points, but has increased as of late due to Euro bank concerns. The TED spread is a gauge of the willingness of banks to lend to one another. The lower the TED spread the more willing banks are to lend with each other. The TED spread fluctuates over time but generally has remained within the range of 10 and 50 bps (0.1% and 0.5%) except in times of financial crisis. A rising TED spread often presages a downturn in the U.S. stock market, as it indicates that liquidity is being withdrawn.
Last week, oil was up +4.3% and closed at $100.96 per barrel. Year-to-date oil is up +10.5%. The average price of unleaded gasoline dropped -0.6% last week to end at $3.276 per gallon per December 4th data provided by AAA. Year-to-date, unleaded gasoline is up +6.6%. Natural gas was up +1.2% last week and closed at $3.584/MMBtu. Year-to-date, natural gas is down -18.6%.
Last week, gold rose +3.7% closing at $1,747.00 per troy ounce. Year-to-date, gold is up +22.9%. The dollar was down -1.2% last week as measured by the U.S. Dollar Index with that index closing at 78.625. Year-to-date, the U.S. Dollar is down -0.5% as measured by the Dollar Index. The Euro was up +1.9% against the U.S. dollar closing at $1.3487/Euro. Year-to-date, the Euro is up +0.9% against the U.S. Dollar.
In the coming week, look for corporate earnings from companies such as Dollar General (“DG”), AutoZone (“AZO”), Toll Brothers (“TOL”), and Costco Wholesale (“COST”). Look for economic reports this week on non-manufacturing (services) activity, factory orders, trade balance, and weekly jobless claims data.
Sources: Bloomberg, The Wall Street Journal, Barron’s, The New York Times, ValueLine.

Banks: Too Big to Fail Again …

It reads like a 29,000 page conspiracy theorist novel and it took two years and the Freedom of Information Act to discover that the Federal Reserve, led by Ben Bernanke, secretly loaned the big banks more than $1.2 trillion in bail-out money on December 5, 2008.  This secret lending ballooned to as much as $7.7 trillion by March 2009.  The banks quietly accepted the loans while at the same time assuring their shareholders and customers that they were in fine financial condition.  They then used these near-zero interest loans to produce an estimated $13 billion of income.  Note that all of these funds were in addition to the much publicized $700 billion in ‘Troubled Asset Relief Program’ or TARP funds granted by Congress in 2008.  In fact, the Federal Reserve did not disclose to Congress that these loans took place.

Bloomberg LP, the parent of Bloomberg News had to file a lawsuit against the Federal Reserve and the Clearing House Association to force the disclosures.  Bloomberg won its case but the Fed and Clearing House Association appealed the decision all the way to the US Supreme Court, who refused to hear the case.  I’m certain that you’ve never heard of the Clearing House Association but it’s comprised of some of the largest banks in the world including Bank of America, Wells Fargo, JP Morgan Chase, Citigroup, Bank of New York Mellon and US Bancorp.  Many of these banks were the significant beneficiaries of the Fed secret loans that they did not want disclosed to the American public.

What did the big banks do with this money and the revenue it generated?  Well, not a lot of lending for one thing.  A few CEO’s heads rolled as they were fired but exited with multimillion dollar severance packages while their replacements stepped into their shoes and began to reap multimillion dollar incentive packages.  Apparently, the incentive rewards aren’t tied to performance since banks have been among the worst performing sector over the past few years.  Worse, as Congress stepped in with proposed legislation to limit the size and restrict the activities of the big banks that caused the crisis, the banks increased their lobbying expenditures by an estimated 33%… a total of $29 billion.  This taxpayer money was well-spent as the legislation was defeated allowing the banks to grow even bigger and to continue much of the same activities that lead to the crisis in the first place. In fact, total assets held by the six largest banks have increased by 39%…definitely too big to fail.

In essence, the Fed positioned itself as judge, jury and executioner as it decided which banks got loans and which banks were allowed to fail…a number that exceeds 200 since the 2008 crisis began.

These loan activities crossed two administrations.  If Congress didn’t know about the secret loans, did Presidents Bush and Obama?  I can draw only two conclusions.  Both Presidents Bush and Obama knew of the details of the loans and determined that Congress was on a ‘need to know’ basis or they didn’t know…neither assumption is reassuring.

Least you consider this article nothing more than an opinion piece; these secret activities have real implications for investors.  Consider Bank of America shareholders who on November 26, 2008 when the stock price was $14.93 per share,  received written communication from then CEO Kenneth Lewis that stated BOA was “one of the strongest and most stable major banks in the world.”  What he failed to mention was that BOA owed the central bank $86 billion.  Today, the stock is trading at $5.20 per share.

As investors, our job is difficult enough as we sift through mounds of accurate data to make investment decisions.  To the extent that we lose confidence in the data produced directly from the corporations we research, it makes our job much more difficult. Situations like this make it easy to understand why Occupy Wall Street protesters are angry and Tea Party members are advocating for less government.

In summary, America’s largest banks remain too big to fail and are essentially continuing to operate much as they were before the crisis.  My prediction is that before this decade has ended, we’ll face another banking crisis.  The questions are, “what’s our government going to do the next time…and will they tell us or keep it a secret?”

My source for this article was “Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress” by Bloomberg News.  To read the entire article, visit the Business Section ofwww.NewsTimes.com.

If you’d like to have your financial question answered in The Birmingham News, email me atstewart@GetRichOnPurpose.com and place Bhm News in the subject line.

Stewart H. Welch, III, CFP, AEP, is the founder of THE WELCH GROUP, LLC, which specializes in providing fee-only investment management and financial advice to families throughout the United States. Mr. Welch has been recognized by Money, Worth, Mutual Funds Magazine and Medical Economics as one of the top financial advisors in the country. He is the co-author of The Complete Idiot’s Guide to Getting Rich (Alpha Books) and J.K. Lasser’s New Rules for Estate and Tax Planning (John Wiley & Sons, Inc.). Visit his Web Sitewww.stewartwelch.com. Consult your financial advisor before acting on this advice.

Stocks had their WORST Thanksgiving Week Since 1932

Up to date in less than 2 minutes:
Last week, U.S. stocks tumbled in the worst Thanksgiving-week loss for the Standard & Poor’s 500 Index since 1932 as concern grew that Europe’s debt crisis will spread and American policy makers failed to reach agreement on reducing the federal budget. For the week, the Dow, S&P 500, NASDAQ, and Russell 2000 all dropped -4.8%, -4.7%, -5.1%, and -7.4%, respectively.

 

Equity Performance Table
Last Week
Year to Date
Last 52 Weeks
Dow Jones Industrial
-4.8%
-3.0%
+1.3%
S&P 500 (Large Caps)
-4.7%
-7.9%
-2.6%
NASDAQ (Technology)
-5.1%
-8.0%
-3.7%
Russell 2000 (Small Caps)
-7.4%
-15.0%
-9.1%
International Stocks (EAFE)
-5.7%
-20.5%
-15.8%
Dow Jones Total Stock Market (Broad Market)
-4.9%
-9.0%
-3.7%

 

 

Interest Rates
Prime Lending Rate
3.25%
Interest Rate Bias
Short-Term = Neutral; Intermediate Term = Neutral; Long-Term = Neutral
90 T-bill Rate
0.02%
90 Day LIBOR
0.52%
TED Spread
0.50%
30-Year Mortgage Rate
4.02%
15-Year Mortgage Rate
3.38%
5-Year Adjustable Mortgage Rate
2.97%
30-Year Treasury Yield
2.92%
10-Year Treasury Yield
1.97%
5-Year Treasury Yield
0.93%
2-Year Treasury Yield
0.28%

 

 

Notable Dividend Increases – 2011
Lockheed Martin (“LMT”)
33.3%
NextEra Energy (“NEE”)
10.0%
United Technologies (“UTX”)
12.9%
Proctor & Gamble (“PG”)
9.0%
Abbott Labs (“ABT”)
9.1%
Clorox (“CLX”)
9.0%
Colgate Palmolive (“CL”)
9.4%
Chevron Corp (“CVX”)
8.3%
Emerson Electric (“EMR”)
15.9%
General Mills (“GIS”)
8.9%
International Business Machines (“IBM”)
15.4%
Union Pacific Corp (“UNP”)
25.0%
Intel Corp (“INTC”)
33.0%
McDonalds Corp (“MCD”)
14.8%
Kimberly Clark (“KMB”)
6.1%

 

 
Now, all the details……………………
The S&P 500 has fallen for seven days, the longest streak in four months, and has tumbled -7.6% so far in November. U.S. equities erased an early advance on the final session last week as S&P lowered Belgium’s credit rating and Reuters reported that Greece is demanding private investors accept larger losses on their debt. “We’ve resumed focus on the European debt issues,” Terry L. Morris, senior equity manager at Wyomissing, Pennsylvania-based National Penn Investors Trust Co., said in a Bloomberg telephone interview.  His firm manages about $2.2 billion.  “The situation in Europe doesn’t seem to be improving, which makes the market defensive,” he said.  “Spending cuts kicking in the U.S. will be a negative too because it will be a drag on economic growth.”
The cost of insuring European sovereign bonds against default rose to a record last week as Germany failed to find buyers for 35% of the bonds offered at an auction.  German Finance Minister Wolfgang Schaeuble said market turbulence sparked by the euro region’s sovereign-debt crisis will last for “a few months.” U.S. Congress’s special debt-reduction committee failed to reach an agreement last week, setting the stage for $1.2 trillion in automatic spending cuts and fueling concern that economic-stimulus measures that are set to expire will not be renewed. Still, S&P reaffirmed it would keep the U.S.’s credit rating at AA+ after stripping the government of its top AAA grade on August 5th.
Stocks fell last Tuesday, November 22nd as revised Commerce Department figures showed that gross domestic product climbed at a 2% annual rate in the third quarter, less than projected and down from a 2.5% prior estimate.  U.S. stock exchanges were closed on November 24th for Thanksgiving and closed three hours early on November 25th.
All 10 groups in the S&P 500 fell last week, led by a -6.2% slump in energy producers and a -5.8% drop in financial shares.
The MSCI EAFE Index (broad developed international index) fell -5.7% last week. The Americas dropped -5.1% with Brazil down -3.2%, Mexico down -4.7%, and Canada down -3.6%. Europe dropped -4.6% with Germany down -5.3%. Asia-Pacific fell -4.5% with Australia down -4.6%, China down -1.5%, Hong Kong down -4.3%, India down -4.1%, Taiwan down -6.2%, and Japan down -2.6%.
Treasuries rose in price with the 10 year yield dropping to 1.97% from 2.01% in the week earlier.
The Baltic Dry Index, which tracks transport costs on international trade routes and may be a good leading indicator of economic activity, ended the week at 1,807, down from the prior week’s level of 1,895. The index reached a high of 11,793 on May 20, 2008 and a low of 663 on December 5, 2008. The index last peaked at 4,661 set on November 11, 2009.
The TED spread measuring the difference between LIBOR and Treasury bill rates, which rose as high as 464 basis points during the liquidity crisis of 2008, is currently in more of a normal range of 50 basis points, but has increased as of late due to Euro bank concerns. The TED spread is a gauge of the willingness of banks to lend to one another. The lower the TED spread the more willing banks are to lend with each other. The TED spread fluctuates over time but generally has remained within the range of 10 and 50 bps (0.1% and 0.5%) except in times of financial crisis. A rising TED spread often presages a downturn in the U.S. stock market, as it indicates that liquidity is being withdrawn.
Last week, oil was down -0.9% and closed at $96.77 per barrel. Year-to-date oil is up +5.9%. The average price of unleaded gasoline dropped -1.7% last week to end at $3.295 per gallon per November 27th data provided by AAA. Year-to-date, unleaded gasoline is up +7.2%. Natural gas was up +6.8% last week and closed at $3.542/MMBtu. Year-to-date, natural gas is down -19.6%.
Last week, gold dropped -2.3% closing at $1,685.50 per troy ounce. Year-to-date, gold is up +18.6%. The dollar was up +2.1% last week as measured by the U.S. Dollar Index with that index closing at 79.686. Year-to-date, the U.S. Dollar is up +0.8% as measured by the Dollar Index. The Euro was down -2.1% against the U.S. dollar closing at $1.3238/Euro. Year-to-date, the Euro is down -1.0% against the U.S. Dollar.
In the coming week, look for corporate earnings from companies such as Tiffany (“TIF”), Big Lots (“BIG”), Guess? Inc. (“GES”), and Barnes & Noble (“BKS”). Look for economic reports this week on new home sales, consumer confidence, manufacturing, unemployment rate, and weekly jobless claims data.
Sources: Bloomberg, The Wall Street Journal, Barron’s, The New York Times, ValueLine.

Stocks Continue Rally on European Bailout News – October 31, 2011

Up to date in less than 2 minutes: Last week, U.S. stocks rose driving the Standard & Poor’s 500 Index toward the biggest monthly gain since 1974, after European leaders agreed to expand the region’s bailout fund and American economic growth accelerated. For the week, the Dow, S&P 500, NASDAQ, and Russell 2000 gained +3.6%, +3.8%, +3.8%, and +6.8%, respectively. Equity Performance Table Last Week Year to Date Last 52 Weeks Dow Jones Industrial +3.6% +5.6% +10.0% S&P 500 (Large Caps) +3.8% +2.2% +8.6% NASDAQ (Technology) +3.8% +3.2% +9.2% Russell 2000 (Small Caps) +6.8% -2.9% +8.2% International Stocks (EAFE) +6.3% -2.9% +0.0% Dow Jones Total Stock Market (Broad Market) +4.2% +1.2% +8.4% Interest Rates Prime Lending Rate 3.25% Interest Rate Bias Short-Term = Neutral; Intermediate Term = Neutral; Long-Term = Neutral 90 T-bill Rate 0.00% 90 Day LIBOR 0.43% TED Spread 0.43% 30-Year Mortgage Rate 4.20% 15-Year Mortgage Rate 3.45% 5-Year Adjustable Mortgage Rate 3.00% 30-Year Treasury Yield 3.38% 10-Year Treasury Yield 2.32% 5-Year Treasury Yield 1.13% 2-Year Treasury Yield 0.29% Notable Dividend Increases – 2011 Lockheed Martin (“LMT”) 33.3% NextEra Energy (“NEE”) 10.0% United Technologies (“UTX”) 12.9% Proctor & Gamble (“PG”) 9.0% Abbott Labs (“ABT”) 9.1% Clorox (“CLX”) 9.0% Colgate Palmolive (“CL”) 9.4% Chevron Corp (“CVX”) 8.3% General Mills (“GIS”) 8.9% International Business Machines (“IBM”) 15.4% Union Pacific Corp (“UNP”) 25.0% Intel Corp (“INTC”) 33.0% McDonalds Corp (“MCD”) 14.8% Kimberly Clark (“KMB”) 6.1% Now, all the details…………………… Last week, the S&P 500 rose +3.8% to 1,285.09, the highest since August 1st. It has rallied four straight weeks, the longest streak since January, and added +14% in October. The Dow gained 422.32 points, or +3.6%, to 12,231.11. Stocks gained after the European rescue fund was boosted to 1 trillion euros ($1.4 trillion) and investors agreed to a voluntary writedown of 50% on Greek debt. The S&P 500 had fallen five consecutive months, driven lower by concern the European debt crisis would curb global growth. “The crisis atmosphere has lessened,” Nick Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati, which oversees more than $38 billion, said in a Bloomberg telephone interview. “European policy makers have bought more time,” he said. “It’s not a permanent solution, but it limits the immediate risk to the market.” Equities also climbed after the U.S. economy expanded in the third quarter at the fastest pace in a year, as gains in consumer spending and business investment helped support a recovery on the brink of faltering. Separate data showed that consumer confidence unexpectedly rose in October, while fewer Americans filed for unemployment assistance. Last week, raw-material producers gained +7.9%, the most among 10 industry groups in the S&P 500, after a report from HSBC Holdings Plc and Markit Economics showed China’s manufacturing may end the longest contraction since 2009. The report, along with Japanese data showing exports exceeded economists’ forecasts, signaled that Asia’s two largest economies are withstanding Europe’s sovereign debt crisis. Last week, financial shares in the S&P 500 rose +7%, the biggest advance since July 2010, as 76 of 81 companies rose. Morgan Stanley (“MS”) soared +13% to $19.31. JPMorgan Chase & Co. (“JPM”) jumped +9.8 to $36.69. Bank of America (“BAC”), which has dropped -45% this year for the worst performance in the Dow, surged +14% to $7.35. Companies most-tied to the economy gained as the Morgan Stanley Cyclical Index advanced +7%. Caterpillar (“CAT”) increased +11% to $96.85. The world’s largest construction and mining-equipment maker posted higher-than-expected third-quarter profit and sales and said 2012 revenue will gain as the U.S. and global economies improve. Last week, 189 companies in the S&P 500 reported quarterly results. Approximately 75% of the companies that reported earnings since October 11th beat analysts’ projections, according to Bloomberg data. Earnings have surpassed estimates by an average +5.8%. Third-quarter corporate earnings “show things aren’t as bad as the market thought,” Terry Morris, who manages $2.2 billion at National Penn Investors Trust Co. in Wyomissing, Pennsylvania, said in a Bloomberg phone interview. “Maybe things will be kind of quiet in Europe now and we can get back to fundamentals.” The MSCI EAFE Index (broad developed international index) rose +6.3% last week. The Americas rose +4.7% with Brazil up +7.7%, Mexico up +4.8%, and Canada up +4.8%. Europe rose +4.2% with Germany up +6.3%. Asia-Pacific rose +7.1% with Australia up +5.1%, China up +6.7%, Hong Kong up +11.1%, India up +6.1%, Taiwan up +5.0%, and Japan up +4.3%. Treasuries dropped in price with the 10 year yield rising to 2.32% from 2.22% in the week earlier. The Baltic Dry Index, which tracks transport costs on international trade routes and may be a good leading indicator of economic activity, ended the week at 2,018, down from the prior week’s level of 2,153. The index reached a high of 11,793 on May 20, 2008 and a low of 663 on December 5, 2008. The index last peaked at 4,661 set on November 11, 2009. The TED spread measuring the difference between LIBOR and Treasury bill rates, which rose as high as 464 basis points during the liquidity crisis of 2008, is currently in more of a normal range of 43 basis points, but has increased as of late due to Euro bank concerns. The TED spread is a gauge of the willingness of banks to lend to one another. The lower the TED spread the more willing banks are to lend with each other. The TED spread fluctuates over time but generally has remained within the range of 10 and 50 bps (0.1% and 0.5%) except in times of financial crisis. A rising TED spread often presages a downturn in the U.S. stock market, as it indicates that liquidity is being withdrawn. Last week, oil was up +6.8% and closed at $93.32 per barrel. Year-to-date oil is up +2.1%. The average price of unleaded gasoline dropped -0.2% last week to end at $3.443 per gallon per October 30th data provided by AAA. Year-to-date, unleaded gasoline is up +12.0%. Natural gas was up +2.5% last week and closed at $3.923/MMBtu. Year-to-date, natural gas is down -10.9%. Last week, gold rose +6.8% closing at $1,746.20 per troy ounce. Year-to-date, gold is up +15.1%. The dollar was down -1.6% last week as measured by the U.S. Dollar Index with that index closing at 75.067. Year-to-date, the U.S. Dollar is down -1.6% as measured by the Dollar Index. The Euro was up +2.9% against the U.S. dollar closing at $1.4158/Euro. Year-to-date, the Euro is up +5.9% against the U.S. Dollar. In the coming week, look for a slew of corporate earnings from the likes of Humana Inc. (“HUM”), Emerson Electric (“EMR”), Consolidated Edison (“ED”), Vulcan Materials (“VMC”), CenturyLink (“CTL”), MasterCard (“MA”), and Berkshire Hathaway (“BRK/B”). Look for economic reports this week on manufacturing and non-manufacturing activity, ADP employment change, FOMC rate decision (no change expected), October unemployment, and weekly jobless claims data. Sources: Bloomberg, The Wall Street Journal, Barron’s, The New York Times, ValueLine.