Most market observers believe debt ceiling will be raised
With less than two weeks until the August 2 deadline for raising the debt ceiling, investor focus has been glued to the debate. Lawmakers have been negotiating ways to cut spending and raise the nation’s borrowing limit for months, but there is still no articulated path forward. Treasury Secretary Timothy Geithner said Sunday on CNN's State of the Union, "We're almost out of runway. We're not nowhere, but we're almost out of runway." In the days ahead, markets around the world will be looking for reassurance that the U.S. political system can compromise on solutions for the greater good.
Helping to balance uncertainty in Washington, last week was one of surprisingly positive earnings reports that lifted major indexes to weekly gains. The Dow rose more than 1% and the S&P 500 and Nasdaq more than 2%. Analysts also cited relative progress on both the U.S. debt ceiling issue and the ongoing European debt crisis as partial reasons for the positive results.
This week promises to be a busy one both for stocks and economic reports.180 companies in the S&P 500 are scheduled to report quarterly financial results; the August 2 deadline for raising the debt ceiling is rapidly approaching; and Friday will bring the first official report on second-quarter economic growth.
With everything featured in the headlines right now, we understand that you may have some concerns about how your investments could be affected. Please rest assured that we are closely monitoring all relevant activity and will keep you informed about any steps that need to be taken. At the same time, we would like to reiterate that we do not believe now is the time for drastic action. If you have questions or would like additional information, please feel free to contact us. We are always here to lend a hand.
Data as of 07/22/2011 1-Week YTD 1-Year 5-Year 10-Year
Standard & Poor's 500 2.19 6.95 23.0 1.69 1.11
Dow 1.61 9.53 22.9 3.34 1.99
NASDAQ 2.47 7.76 27.3 8.30 4.09
MSCI EAFE 3.44 5.38 21.5 1.95 3.49
10-year Treasury Note (Yield Only) 2.91 NA 2.93 5.05 5.11
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. NA means not available.
HEADLINES:
The dollar fell as U.S. lawmakers failed to agree on raising the nation’s $14.3 trillion debt ceiling. America’s currency weakened against the Swiss franc, yen and euro.
Investors outside the U.S. own $4.51 trillion in U.S. Treasuries, or about 50% of the marketable government debt outstanding, according to the Treasury Department.
Last week marked the first anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank’s crucial innovation was to identify sources of systemic risk in the banking system, and to provide regulatory tools to lessen the problem.
A year after the bill became law, it still has many critics and champions.
Two coordinated terror attacks in Norway have left at least 92 dead. Flags are flying at half-staff and the Army is patrolling the streets in a city that just endured its worst peacetime attack in history. Our thoughts are with them.
Everything you wanted to know about the debt ceiling and its impact
Balance the budget; curtail spending; reduce debt – three aspects of simple fiscal management. At one time or another, nearly every American has done these things to keep their financial house in order. Now it’s the government’s turn. Trouble is, the powers that be haven’t agreed on how to do it. Meanwhile, all the posturing in Washington is fueling investor frustrations as experts warn that failing to raise the debt ceiling will have disastrous consequences. Why is this such a complicated issue? And perhaps more importantly, why does immediate action need to be taken?
At a fundamental level, the problem is that the U.S. government spends more money than it takes in (See Chart). In order to cover the bills, it borrows money, thus the national debt. In theory, the debt ceiling is supposed to help Congress control spending, in reality, it isn’t working. Since 1962, the ceiling has been raised 74 times, ten of which have occurred since 2001.
What is the debt ceiling anyway?
It is a limit set by Congress on the amount of debt the federal government can borrow. The limit applies to debt owed to the public (e.g. U.S. bond holders) and debt owed to federal government trust funds such as those for Social Security and Medicare.
How high is the debt ceiling right now? The ceiling is currently set at $14.294 trillion. The country's accrued debt reached that mark on May 16, 2011. Currently, Treasury Secretary Timothy Geithner is taking various measures to allow the government to continue borrowing until August 2nd.
What now?
Nobody knows for sure how things are going to play out and the uncertainty is frustrating to say the least. Here are a few of the options that are currently being debated:
1) Do nothing.
This is not an option we want to see elected. If no action is taken, the Treasury will not have authority to borrow any more money. And since the government borrows to make up the difference between what it spends and what it collects, funds would not be available to pay the country’s bills.
Failure to act would create serious economic repercussions. At a minimum, a default would hurt U.S. bonds, the dollar, and investors' portfolios. And while a total government shutdown is unlikely, many who depend on government checks – from active-duty soldiers, veterans, and federal workers to name a few – could find their mailboxes empty. Which payments would be delayed is not known, but any choice would cripple parts of the economy and anger many groups of Americans.
Agree on a plan to reduce the budget deficit and national debt.
A package of $4 trillion in spending cuts and revenue increases is widely considered by fiscal experts to be the only way to start reining in the runaway U.S. debt. In this respect, the key issue is not just that a deal be made, but that it qualifies as a long-term solution.
Two key ratings agencies have said they expect policymakers to agree on a plan to meaningfully reduce the debt. Moody's Investors Services said Wednesday it would likely change its outlook on U.S. debt from “stable” to "negative" unless "substantial and credible agreement is achieved on a budget that includes long-term deficit reduction." Standard & Poor's went farther on Thursday by announcing there is a fifty percent chance it would downgrade the U.S. within 90 days if a credible agreement is not reached.
And while most Americans understand that changes need to be made, the politicians can’t agree on what those changes should be. To quote the president, “The American people are sold” on the idea of balancing spending cuts with tax increases. The problem is members of Congress are dug in ideologically.”
Even if the government agreed to cut all discretionary spending it wouldn’t make up for half of the deficit. Even eliminating social security and all defense spending would barely cover the deficit. And of course, that can’t be done. So as you see, policy makers have a serious challenge on their hands.
2) Raise the debt ceiling again.
Most experts agree that policymakers will raise the debt ceiling. If for no other reason, because the consequences of not doing so are too great. If the debt ceiling is breached, interest that the government pays on its debt will rise, pushing the deficit even higher.
Federal Reserve Chairman Ben Bernanke was on Capitol Hill Thursday, warning that failure by Congress to raise the debt ceiling would create "a calamitous outcome." Global confidence in U.S. Treasuries and the nation's AAA credit rating are among our nation's greatest economic assets, and according to Bernanke, "Losing that credit rating would be a self-inflicted wound". It would also be bad news for the labor market, the Fed chairman explained, which is an area of growing concern since the June jobs report showed hiring slowed to a crawl. In short, failing to raise the debt ceiling would be bad news all around.
It is our hope that a combination of efforts involving raising the debt ceiling and implementing a plan to begin reducing the deficit will be agreed upon promptly.
What are we doing in the meantime?
We have determined that it is too risky to try and predict what the outcome of this situation will be, and if we get a prediction wrong, it could cost our clients money.
Overall, we have confidence that some sort of agreement will be reached and we do not think now is the time to take drastic action. We realize it may not be especially reassuring for you to hear this, but we believe it is the best choice.
Rather than reacting too conservatively or aggressively, we continue to maintain that a balanced approach to investing, including diversification and maintaining long-term vision, is the best way to weather storms like this. We will, however, keep a close eye on the situation and monitor how any developments have the potential to affect your portfolio.
If you have any questions or concerns, please don’t hesitate to reach out to us. It is a pleasure serving you.
Jobs needed, for US Markets
Three things were on the minds of investors last week – jobs, jobs, and jobs.
U.S. Stocks posted broad losses on Friday as investors digested a disappointing June jobs report that showed hiring virtually stalled last month. The Labor Department's report showed the U.S. economy created only 18,000 jobs, a fraction of the 120,000 that economists predicted. At the same time, the unemployment rate rose to 9.2% from 9.1%, rather than declining as hoped.
Interestingly, the government's employment report came as a sharp contrast to two better-than-expected reports released Thursday on the job market, which helped U.S. stocks rise sharply. Payroll processing company ADP said private jobs grew rapidly in June – a figure that was much higher than anticipated and more than four times higher than May’s numbers. (ADP measures only private jobs, while the Bureau of Labor Statistics measures both private and public sector jobs.)
So on Thursday, positive jobs reports were good for stocks, while on Friday, negative jobs reports were bad for stocks. Why is everyone so focused on the nation’s employment picture? Put simply, the U.S. is a consumption economy. When Americans spend money on things like cars, clothes, and eating out, our economy grows. When people don’t have gainful employment, they spend less, companies earn less, and slower economic growth ensues. For these reasons and more, the jobs picture commonly affects stock market performance.
In the weeks ahead, investors will shift their focus to the health of Corporate America as companies start reporting earnings for the second quarter. Many expect that strong earnings and outlooks will help compensate for weak jobs data, and will reinforce that the recovery is still progressing.
ECONOMIC CALENDAR: Tuesday – International Trade, FOMC Minutes Wednesday –Import and Export Prices, Ben Bernanke Speaks, EIA Petroleum Status Report, Treasury Budget
Thursday – Producer Price Index, Retail Sales, Jobless Claims, Business Inventories
Friday – Consumer Price Index, Empire State Mfg Survey, Industrial Production, Consumer Sentiment
HEADLINES:
Betty Ford, the former first lady whose triumph over drug and alcohol addiction became a beacon of hope for addicts and the inspiration for her Betty Ford Center in California, died at age 93 on Friday. Her death was confirmed to The Associated Press by Marty Allen, chairman emeritus of the Ford Foundation. The former first lady died at the Eisenhower Medical Center in Rancho Mirage. Other details of her death were not immediately available.
The last shuttle thundered into orbit Friday on a cargo run that will close out three decades of both triumph and tragedy for NASA and usher in a period of uncertainty for America's space program.
South Sudan became the world's newest country Saturday with a raucous street celebration at midnight. South Sudanese citizens, international dignitaries and the world's newest president are convening in the new country capital of Juba to celebrate the birth of a nation.
European Union President Herman Van Rompuy has called a meeting of top EU policy makers Monday to discuss plans for a second bailout package for Greece, EU officials said on Sunday. The gathering comes as Europe continues to struggle with a contentious issue: whether and how Greece's private-sector creditors should share the burden when the anticipated second aid package is doled out to the debt-burdened country.
Fed Chair Bernanke makes a significant ‘revision’ for 2011, and 2012
With the Dow logging its seventh drop in eight weeks and the S&P off 7% from its three-year high at the end of April , many people are wondering if the markets have hit a speed bump or a roadblock. Combine weak stock performance with lukewarm economic readings and it’s easy to understand Fed chairmen Ben Bernanke’s comments last week: “We don’t have a precise read on why this slower pace of growth is persisting…some of these headwinds may be stronger and more persistent than we thought.”
The expressions: “We don’t have a precise read” and “than we thought” are interesting. They clearly demonstrate that even the “experts” do not have all the answers, and that they must change their viewpoint from time to time. Along these lines, the Fed issued new economic projections that call for slower growth, higher unemployment and higher inflation in 2011 and 2012 than in its previous forecast. At a press conference Wednesday afternoon, Bernanke referred to the new forecast as a significant revision. At the same time, the Fed still downplayed the chance of another recession, saying that it "expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline."
Why do we point this out? This illustrates why we do not try to predict the future of the stock market or the economy. Doing so consistently and accurately is simply not possible. Whether we are facing a temporary slowdown or one that will last much longer is still open to interpretation and there are vocal proponents on both sides of the issue.
Since there is no way for us to predict the future, our goal is to help you commit to a sound investment plan based on your personal risk tolerance, goals and time horizon. Doing this requires that we take a long-term approach, not a short-term one. If we lose sight of the long-term and think we can time the market by exiting at the peak and re-entering at the trough, we open ourselves up for big mistakes. To quote legendary investor Warren Buffet: "Someone is sitting in the shade today because someone planted a tree a long time ago."
ECONOMIC CALENDAR: Monday – Personal Income and Outlays Tuesday – S&P Case-Shiller-HPI, Consumer Confidence Wednesday – Pending Homes Sales Index, EIA Petroleum Status Report
Thursday – Jobless Claims, Chicago PMI Friday – Motor Vehicle Sales, Consumer Sentiment, ISM Mfg Index, Construction Spending
Data as of 06/24/2011 1-Week YTD 1-Year 5-Year 10-Year
Standard & Poor's 500 -0.24 0.86 18.1 0.38 0.35
Dow -0.58 3.08 17.6 1.72 1.25
NASDAQ 1.39 0.00 19.6 5.01 3.04
MSCI EAFE -0.76 -0.02 20.1 1.04 2.59
10-year Treasury Note (Yield Only) 2.94 NA 3.12 5.23 5.12
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. NA means not available.
HEADLINES:
Irving Picard, the trustee liquidating Bernard Madoff’s firm, revised a claim against JPMorgan Chase & Co. requesting a minimum payment of $19 billion in damages for its role in the fraud. The new amount represents Picard’s latest estimate of principal lost by all Madoff investors by the time the Ponzi scheme collapsed in December 2008.
On Thursday, President Obama decided to release 30 million barrels of oil from the nation's strategic reserve, which will put 60 million barrels of fuel on the market over the next 30 days. Done in conjunction with other developed nations including Saudi Arabia, the move is not only an attempt to salvage Libya’s lost supply and meet rising demand in Asia and the Middle East, but is also seen as an attempt to lower fuel prices.
New-home sales fell 2.1% in May, the Commerce Department reported Thursday. The numbers showed a seasonally adjusted annual rate of 319,000 homes, far below the 700,000 homes per year that economists say must be sold to sustain a healthy housing market.
An EU-IMF team has approved Greece’s new five-year austerity plan after committing to an additional round of tax rises and spending cuts.
Can the economy improve for the second half of 2011?
Though our economic growth is being challenged by some strong headwinds, including high food prices, high gas prices, and a soft housing market, good news came at the right time last week. The Conference Board reported on Friday that its index of leading economic indicators grew by 0.8% in May. This represents the largest increase since February and is a strong improvement over the initial forecast. Some of the things that helped lift the index were:
• Federal Reserve policies designed to help financial markets.
• An increase in building permits, which signal future construction.
• A boost in consumer confidence as gas prices fell.
• Fewer people applying for unemployment benefits.
This report reaffirms what many economists have already been saying – while we are clearly facing some obstacles, the overall picture is improving. According to Moody’s analytics, economists are anticipating second-quarter growth between 2% and 2.5%. "Consumers are not panicking. We should begin to emerge from the soft patch in the second half of the year; a lot of the drags on the recovery are fading," said Ryan Sweet, a senior economist there.
In related news, the Dow rose for the first time since April and the S&P 500 broke a six-week losing streak by climbing 0.3%. In addition, suppliers are finally able to predict full rebounds from the March Japanese earthquake, with Honda projecting a return to normal production in August and Toyota following suit in September. While the economic recovery will likely continue to ebb and flow, these are some of the signs that we are still headed in the right direction.
ECONOMIC CALENDAR: Tuesday – Existing Home Sales Wednesday – EIA Petroleum Status Report, FOMC Meeting
Thursday – Jobless Claims, New Home Sales Friday – Durable Goods Orders, GDP
HEADLINES:
The Senate voted Thursday to cut the $5 billion-a-year subsidy given to oil refiners for blending ethanol into gasoline. Provided in the form of tax credits, the subsidy gives 45 cents a gallon to refiners who use ethanol, a renewable fuel additive that comes mainly from corn in the U.S..
Ownership of the Los Angeles Dodgers baseball team will be determined by a one-day divorce trial. The outcome will decide whether Frank McCourt is the sole owner, or if the team should be considered community property, which could likely lead to a sale of the team.
Microsoft won antitrust approval to complete the purchase of Skype, an internet phone service. Its largest acquisition to date, the company will buy Skype for $8.5 billion.
In the United States, 176 million people watched online videos last month, much of it on YouTube, according to the latest survey by comScore. Each person watched 15.9 hours on average.
Has the economy hit a "soft patch"? Or something worse?
With hiring at a crawl, home prices at a low, consumer and business spending slowing, and the stock market logging its sixth straight week of losses, headlines continue to declare doom and gloom. As is frequently the case, all this negative press has caused investor sentiment to swing wildly. The latest American Association of Individual Investors (AAII) survey shows that bearish sentiment jumped 14.2% last week alone. Despite the bearish sentiment though, there are positive markers that bode well for a slow-growth recovery.
While leading economists have trimmed their forecast for 2011 GDP growth to 2.7% from 3% a month ago, they are still predicting stronger growth for the second half of the year. 2.7% isn’t that far off the 2.9% growth we saw in 2010. Additionally, manufacturing continues to expand and the ISM Non-Manufacturing Index for May reported that economic activity grew in May for the 18th consecutive month, providing a pleasant surprise last Friday. And while U.S. supply was significantly reduced in the auto and technology sector as a result of the earthquake in Japan, the problems are being steadily resolved.
Lower commodity prices are also a positive side effect of slowed growth. All things being equal, as commodity prices fall, growth prospects improve. In fact, Goldman Sachs Group recently turned bullish on commodities, making the case that dropping prices will stimulate growth and send commodity prices rising again. This aptly illustrates the cyclical nature of our economy.
Strong corporate earnings have allowed for cheaper stocks. Interest rates remain extremely low and aren't expected to start rising until at least a year from now. U.S. exports climbed to an all-time high on Thursday, increasing to $175.6 billion in April, and now comprise 13% of the GDP. As you can see, there is still a lot of positive information out there.
Market sentiment and media reports often go hand-in-hand. When circumstances seem glum, the good news tends to get buried behind fearful forecasts. And while it can be tempting to go with the flow and join the ranks of anxious investors, we urge you to examine every part of the economic picture before drawing conclusions.
ECONOMIC CALENDAR: Tuesday – Producer Price Index, Retail Sales, Business Inventories Wednesday – Consumer Price Index, Empire State Mfg Survey, Industrial Production, Housing Market Index, EIA Petroleum Status Report
Thursday – Housing Starts, Jobless Claims, Philadelphia Fed Survey Friday – Consumer Sentiment
Data as of 06/10/2011 1-Week YTD 1-Year 5-Year 10-Year
Standard & Poor's 500 -2.24 1.06 16.9 0.30 0.05
Dow -1.64 3.23 17.5 1.95 0.89
NASDAQ -3.26 -0.34 19.2 4.76 1.94
MSCI EAFE -2.95 1.56 24.6 1.48 2.36
10-year Treasury Note (Yield Only) 3.00 NA 3.32 4.98 5.33
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. NA means not available.
HEADLINES:
Oil prices fell 2.5% Friday on reports that Saudi Arabia plans to increase production 13% to 10 million barrels per day. The increased production is expected to slow this year’s 26% rise in oil prices and the 2% increase in gasoline.
The Fed will buy $50 billion of Treasury’s in the final series of government bond purchases that marks the last phase of QE2. Launched in November 2010, the purchases will end June 30, though the stimulus will continue with the Fed reinvesting maturing securities.
The White House confirmed that it is considering cutting the payroll taxes that businesses pay. In December employees began paying 4.2% of their wages, two percentage points less than usual, while employers continue to pay the standard 6.2%. The potential policy change hopes to improve employment numbers by promoting hiring.
Paying a total of $2,626,411, an anonymous donor has won lunch with Warren Buffett. Already winning the eBay auction, the bidder topped their previous offer by $100. Proceeds from the auction benefit Glide, an organization that benefits poverty-stricken residents of the San Francisco Bay area.
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA was invented by Charles Dow back in 1896.
The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.
The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
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http://money.cnn.com/2011/06/10/news/economy/recession_economic_survey/index.htm?iid=EL
http://www.aaii.com/sentimentsurvey
http://money.cnn.com/2011/06/10/news/economy/recession_economic_survey/index.htm?iid=HP_LN
http://www.ism.ws/ISMReport/nonmfgROB.cfm
http://www.smartmoney.com/invest/stocks/why-the-market-worrywarts-are-wrong-1307117379674/
http://www.smartmoney.com/invest/stocks/why-the-market-worrywarts-are-wrong-1307117379674/
http://www.smartmoney.com/invest/stocks/why-the-market-worrywarts-are-wrong-1307117379674/
http://www.nytimes.com/2011/06/10/business/10markets.html
http://online.wsj.com/article/BT-CO-20110609-708605.html
http://www.businessweek.com/ap/financialnews/D9NP4RCG1.htm
http://www.cnbc.com/id/43356436
http://blogs.marketwatch.com/election/2011/06/10/employer-payroll-tax-proposal-panned/
http://money.cnn.com/2011/06/10/news/companies/buffett_lunch/index.htm?iid=HP_LN
How much longer will the market's correction continue?
U.S. Stocks fell for the fifth straight week after disappointing reports on jobs and manufacturing fueled concerns that economic growth is slowing. The S&P 500 slid 2.3% to 1,300, its lowest level since March, while the Dow fell 290.32 points, or 2.3%, to 12,151. Should this be cause for alarm? This week, we would like to share what some industry insiders have recently said about the matter.
"Our view is that we're clearly seeing a slowdown, but you'd need a shock to the system to see things get much worse from here. There's little room for error, but there are reasons to expect growth, and we don't see a whole heck of a lot more downside."
- Andrew Goldberg, market strategist at J.P. Morgan Funds in New York
"We don't see material downside from here. A five percent correction is appropriate for the slowdown we're experiencing, and over the intermediate term, our expectation is that we'll regain some momentum.”
- Jim McDonald, chief investment strategist at Northern Trust Global Investments
“Investors should be looking for buying opportunities. The economy is not as bad as it looks right now.
- Byron Wien, vice chairman of Blackstone Advisory Partners
From experience we know that the “experts” aren’t always right. In this case, we agree things are not as bad as some of the headlines make them out to be. The recovery is progressing slower than we would like, but it is still progressing. Until employers start persistently hiring again, the housing market gets straightened out, and Washington figures out what to do about the deficit, the recovery is going to ebb and flow.
The events that ultimately led up to the so-called Great Recession took years, even decades to unfold. In a similar way, the economy will take years to recover, not weeks or months. It is good to keep this fact in mind when we pick up the newspaper, turn on the television, or visit our favorite news website.
ECONOMIC CALENDAR:
Monday: Ben Bernanke Speaks
Tuesday: Consumer Credit
Wednesday: EIA Petroleum Status Report, Beige Book
Thursday: International Trade, Jobless Claims
Friday: Import and Export Prices, Treasury Budget
HEADLINES:
Greece has agreed to speed its sale of state-owned property and cut billions of dollars more from its budget to satisfy requirements for promised loans from the International Monetary Fund and other European countries.
The president of Toyota Motors said on Saturday he expects the automaker to resume full production globally in November and its Japanese output is expected this month to recover to 90% of levels seen before the March earthquake.
Two bottles of the world’s oldest Champagne, which spent about 170 years at the bottom of the ocean, sold for 54,000 euros ($78,400) at an auction in Finland today.
The computer phishing attack that Google says originated in China was directed, somewhat indiscriminately, at an unknown number of White House staff officials, setting off the Federal Bureau of Investigation inquiry that began this week, according to several administration officials.