Secure Planning Inc.

Inflation on the Rise?

2012-02-17T07:53:00.000-08:00

A report released today indicated that inflation is "rising." The report seems to say that the cost of gasoline, in particular, is causing the problem. On closer examination, I wonder about the reality of the rate of inflation. At the end of last year, the annual rate of inflation was 3% for the 12 months ending in December. For the 12 months ending in January, it was 2.9%. To me, it appears that, while inflation is a potential concern, especially to the bond market, it is not out of control and will likely result in no changes to Federal Reserve policies. Still, it bears watching. Ed Mallon

FRB Action

2012-01-26T09:21:00.000-08:00

For the past two days, the Federal Reserve Board has generated a great deal of anticipation over its next action. The Chairman of the FRB, Ben Bernanke, has indicated a willingness to be more open with the thoughts shared by the members and will give a longer-term idea of where short term interest rates will be headed. Yesterday, he gave a clear message that the FRB is planning on keeping interest rates low into 2014, and that it does not see inflation as being the problem it was in 2011. This information is important for planning on how to position fixed income investments for the future. A shift from very short term to higher paying intermediate term fixed investments is now likely, as there will be less fear of an upward shift in interest rates that would reduce the value of bonds. The result will also be likely to mean that corporations will be better able to plan capital expenditures that require financing. Both of these should benefit the economy over time. The stock market is responding favorably to this information, which will be good for corporations, business expansion and profits. Ed Mallon

2011: The Year of Going Nowhere!

2011-12-29T10:31:00.001-08:00

2011 was a very volatile year for the stock markets. The high for the S&P 500 was 1370.58 and the low was 1074.77. That is a difference of more than 25% from high to low. This surely reminds us: buy low and sell high, not buy high and sell low. The year started out with the S&P at 1271.87 and, as I am writing this blog, it stands at about 1260, a slight reduction from the beginning of the year. If you had gone to sleep at the beginning of the year and just woke up, you’d think, “Not much happened in 2011.” For those of us who lived through it, we know this was not the case. With job creation looking better, plus consumer confidence rising, the overall economy of the U.S. looks relatively good going forward. Morningstar Inc. reported in August 2011 that since 12/31/26 thru 12/31/10 the economy had 60 up years, 12 with growth between 0% and 10%, and 48 with growth over 10%. During the same period, 24 were down years, with half of them between 0% and -10%. This appears to be one of those down years. Will 2012 be an up or a down year? I am hoping for an up year, but still am concerned about the situation in Europe. Have a Happy New Year! Ed Mallon

Santa Claus Rally

2011-12-22T09:36:00.000-08:00

Each year we wait to see if we will have a “Santa Claus Rally” in the markets. If we have one, it’s usually an indicator that the coming year will be a good one. If we don’t get the Santa rally, the following year is usually flat or bad. Given the volatility of the current market, it is hard to tell at any one time whether we are having a rally, but let’s say Santa has shown up to lead the way into 2012! At the beginning of 2011, our expectation (as noted in “Outlook for 2011”) indicated a growth rate in GDP of 2.4% for the year and this appears to be the case. The first quarter GDP growth was 0.5%, second quarter 1.5%, third quarter 2.3% and fourth quarter is likely to be in the rage of 3+%. All in all, not too bad. Unemployment, which stood at 10% at the beginning of the year, is now down in the 8% range as we also predicted. Europe did indeed turn out badly¬¬–much worse than predicted. While the U. S. economy has been faring well, we are concerned about our national debt and the sovereign debt of European countries. The new year should be interesting, as I am sure politics will be part of the economic equation. I’d like to remind everyone that, if you are eligible to make a contribution to your IRA for 2011, do so before April 15th. On a final note for the year, I hope each of you has a happy and safe holiday and that the coming year will bring good health and happiness. Ed Mallon

Thanksgiving

2011-11-23T05:49:00.000-08:00

For me this time of the year is a time of reflection and thanks. My grandfather came to this country in the 1870’s with nothing but a strong back. I am the recipient of his and my grandmother’s (who came over as an indentured servant) legacy. As I look back, I think of the Berlin Wall going up; the assassination of a President; a financial meltdown; economic recovery; a Vice President resigning; a President resigning; a financial meltdown; economic recovery; the Berlin Wall coming down! The pattern seems clear to me. We seem to have good times and bad times, we keep going on and get through it all without thinking back about how we did it! My forecast for the future is that we will have more economic recoveries and more financial meltdowns and we will survive and do just fine! I hope you all have a safe and thankful Thanksgiving! Ed Mallon

CD's, Bonds and Stocks

2011-11-14T06:41:00.000-08:00

Recently, I was speaking with someone at one of the banks where we do business and asked about their CD rates. In general, I find CDs to be somewhat of an indicator of inflation. Rates are currently being held artificially low by the Federal Reserve’s quest to keep short-term interest rates as near zero as possible. According to the bank, the rate for a six-month CD was 0.2% and gradually increased with the length of the CD’s term to two years, which was 0.5%. Treasury debt runs from zero for a 90-day maturity to 3% if you project it over 30 years*. If you decide to raise the risk and invest in investment-grade corporate bonds, you will have an average return of about 4.58%, with a maturity that is now out to 5.1 years* (in the past, maturity been more like 4.5 years). If you decide you want a fixed investment and are willing to take more risk, you can buy High Yield bonds, which currently average about 7.82% with an average maturity of about 3.91 years*. As you can see, to get a decent return these days, you need to take more risk. But what about US stocks? The good news is that stocks are up in the US at this point for the year to date. The bad news, as we all know, is that volatility has been horrendous, with stomach wrenching drops followed by heady moves up! The overall answer appears to be: diversify, diversify, diversify! One of our clients recently asked why I don’t comment on the 200-day moving average of the DJIA. This has not been a pretty picture for a while, with the DJIA falling below the 200-day moving average in late July and just recovering to a position above the 200- day moving average at the beginning of November, where it now remains. This is a good sign, because it generally points to the stock market overall momentum headed in an upward direction. We will see! Ed Mallon *Statistical data provided by Bloomberg LP

Another Blah Month-End Closing!

2011-10-31T13:39:00.000-07:00

Yes, once again, today was another month-end downer for the stock markets. But wait, it was an up month! I sometimes wonder why we bother looking at the indexes and the stock market at all. The level of volatility seems extreme and belies the value of the stocks that are being traded. In any event, today the S&P 500 dropped 2.47%, which is hard to take but is likely a reaction to the exuberance on Thursday when the market took off on the “good news” from Europe. I always think, “Do everything in moderation.” On the good side, we saw the S&P 500 rise 10.8% for the month of October. When you get your monthly statements, they should feel warm and fuzzy compared to the end of September, when they just seemed totally fuzzy! Earnings results are coming in better than I expected and the economy is certainly doing better. In the first quarter, GDP was up 0.5%. In the second quarter it increased to 1.3%. With this past August being a total wipeout , I was hoping to see the 1.3% revisited in the third quarter. Instead, GDP was up 2.5%. That is amazing! Manufacturing in September was up a stunning 4% and an economy that was expected to add no new jobs added 103,000. Unless all of this is bogus, the U.S. economy continues to get stronger. Not a bad place to be at this time! Ed Mallon

Change in Direction

2011-09-27T12:32:00.000-07:00

Early Tuesday morning, September 20th I saw a fundamental change in the stock market. What precipitated my real concern was the combination of changing dynamics coming from Asia, the intransigence of world governments and the inversion of supply and demand indicators. In the case of the change in Asia, it was reported that freight and air shipment capacity was being underutilized. The meaning of this is that fewer goods are being manufactured and shipped. This in turn means that the dynamo, that has been Asia, has scaled down dramatically in a very short period of time. At the same time, world leaders, attempting to deal with the debt crisis in Europe, seem stalled. US lawmakers seem unable or unwilling to compromise in a manner that would relieve the strain on consumer confidence that has been in free-fall since late July. Finally, on the technical side, the graph of supply and demand crossed over with demand for stocks dropping while supply increased considerably. This sent a caution signal that would indicate the need to lighten up on stocks and return the funds to more liquid and stable investments. With manufacturing slowing, consumer confidence reduced, government paralysis and technical factors pointing in the wrong direction it seems action is warranted. Although the markets made a turnaround in the latter part of last week and today, the indications for the balance of the year do not provide much solace. When comparing where we were at the end of May and where we are today the forward-looking perspective is that there is a need to be more conservative with funds. This is not anything like I saw in October of 2007, when we moved decidedly to a defensive position, but rather is an attempt to conserve funds to allay investors’ concerns with the turmoil in their statements that have occurred during the past three months. I still believe better days are coming but for now we are in a down draft. Ed Mallon

Stepping up the Market

2011-09-13T10:49:00.000-07:00

Since the latter part of July, we have witnessed volatile markets. On many days, the DJIA has changed as much as 300 points. Yesterday (September 12) was not nearly as bad as some days, but as an example, the low point of the DJIA the market was down 167 points from the day before, but closed up 69 points, a change of 236 points. More meaningfully, the market showed a 98% down day at one point yesterday and closed as a 54% up day. If you didn’t tune in until the end of the day, you might have thought “good day in the market.” It is difficult to be a long term investor if you are looking at day to day or even month to month results. If you add to this the media hyping everything that is negative, you can become very depressed. The question that you need to ask is always “is the market getting better or worse?” To answer that question, you need to first look at the ongoing pattern. Many small investors got out of the market on August 8th. Thus far, this has been the bottom point in the current market seesaw. Since then, we have witnessed increasingly higher lows each time the market has dropped. When you see negatives on your account statement for July followed by August, it’s easy to feel bad. If you bailed on August 8th, you should feel sick, because you did exactly the wrong thing at the wrong time. In a Wall Street Journal article on Monday, September 12th, they reported on a study that was done by Prof. Richard Sylla, a financial historian at New York University. Prof. Sylla studied market behavior from 1790 to 2000. “By analyzing patterns detected years ago with two colleagues, he accurately predicted in 2000 the decade of overall declines that haunted investors.” At the request of the Wall Street Journal, Prof. Sylla has made a new forecast. “Better days lie ahead,” he says. If past market patterns hold true, as they did over the last decade, stocks should bottom out during the next few years and begin a recovery. He is not talking about a week, a month or a year, but a decade. Here is the best part. Prof. Sylla says, the DJIA could climb by 84% by the end of 2020 and the S&P could climb by 99% from last Friday’s close. He is expecting a 6.5%, inflation adjusted, real rate of return over the next decade. Is he correct? I don’t know about his numbers, but his attitude of taking the long view is what is so important. Ed Mallon

Is This Time Different?

2011-08-19T08:43:00.001-07:00

With the recent volatility in the stock markets, I have had several people ask me if this time is different. The easy answer is yes! The reality of the past 13 trading days is that the markets have had an unusually high level of volatility. For example, during the past 13 trading days, we have had 9 days during which the DJIA has moved up or down 400 or more points. Looking at the NYSE operation companies, we have had 9 days during which the percentage of stocks up or down in a given day is 90% (I don’t believe that has ever happened before). As I look at what is happening, it is clear that there are two groups that account for most of this volatility. Small investors have panicked and programmed trading, where computers make the decision to buy and sell based on algorithms. In the first case, small investors, many of whom were burned during the 2008-2009 meltdown of the markets, panicked. “Once burned, twice shy” my mother used to say. By running for the fire exit, many of these individuals, having left in fear, will certainly maintain whatever losses they incurred up to the point of exit and will have a difficult time deciding when to get back in. It has been interesting to see where they are going with their money. Most have gone to money market funds, which are paying nothing, or to gold, which is at its highest in history. As I see gold moving up, I keep thinking of the housing bubble of 2005 when many people said you can’t lose money on gold--oops, I mean real estate. If this volatility continues, we may decide to take some of our equity funds and reduce positions, but to give this a knee jerk reaction is a mistake. I, along with many of you, lived through the dark times of 1974 when markets plummeted. After President Nixon’s resignation in August and his pardon by President Ford in October, the US appeared to be doomed! All of that was forgotten in December as the markets soared. In 1992, we were in an economic downturn, the Japanese were taking over the world and President Bush was kicked out of office because of a dismal economy. Look at what happened between then and 1995. Often, when things seem to be the most dire, Americans bounce back. I believe such will be the case this time, but it sure tries one’s patience as you live through it! I still believe that next year at this time will be better than this year. At this point, this does not appear to be like 2008-2009 but we are preparing to do what’s necessary if the direction does change. Ed Mallon

Panic, Carnage and the Stock Market

2011-08-09T12:29:00.000-07:00

Yesterday, the S&P fell by 6.6% and has fallen by 16.77% since July 22nd! Yipes! The overall reason appears to be a lack of leadership in Washington, resulting in fear in this country and around the world, that the United States has run amok. The result is PANIC! Not a great response. As some of my clients gathered, this just might be a great time to buy. But, is that wise? Let’s go back to a famous point in time when panic set in, with the result that the S&P 500 plunged almost 32%. It was the great panic of 1987, and the country was a mess! So what happened? Let me give you two examples using the S&P 500. Your worst-case scenario would have been to invest your money on August 31, 1987. By December 1, 1987 you would have lost 31.97%. If you had hung on until May 31, 1991, however, less than four years later, you would have had a compound rate of return of 7.96%, which is not too shabby. Suppose instead you saw the carnage and invested at the beginning of December 1987 and left your money in until May 31, 1991. You would have done spectacularly well! Your investment would have grown by a compound rate of 19.15%. The real point of this is that you cannot time the stock market. You must make predictions of where things are going in the future, believe in what you are doing and invest accordingly. I believe we are going through a major bump in the road. But in looking at American businesses, I feel they are strong and are undervalued, and that a year from now our investments will be looking good. For now, you need to brace yourself and accept that this too shall pass. Ed Mallon

Stumbling and Bumbling

2011-08-02T10:57:00.000-07:00

While it will take some time to determine what the fallout will be in total, for now it appears that Washington's decision to kick the can down the road is having a negative impact on the economy. What has become abundantly clear is that we have a lack of leadership in all parts of the government. The S&P 500 had its worst month in over a year in July. As stocks and bonds suffered losses,US and foreign investors lost confidence. One Congressional representative put it very well: "The Greatest Generation passed the ball to us and we dropped it." Looking forward, the reactions of voters in 2012 will be interesting. For now, both small and large businesses have been left in limbo, which usually results in no business expansion. Consumers also hunkered down with a reported drop in consumer spending for June. The GDP report for the second quarter of 2011 came out showing an annualized growth rate of 1.3%, while the anticipated rate was 1.8%. This shortfall, along with lower revised figures for the first quarter from 1.3% down to 0.4%, shows an economy almost at a stall. The bottom line may well be higher unemployment and less job creation. Investors may see a loss of value for the time being. The good news is that most people have short memories and, as the press moves on to other events, we are likely to see a rebound in stocks and bonds, because by most indicators they are underpriced. We will wait and see. Ed Mallon

What's your Perspective?

2011-06-21T13:13:00.000-07:00

Last night I was in a restaurant in Denver, and the server, whom I've know for years, told me that on the previous night an "Economist" patron had said the economy was "doomed" for at least the next eight years. This had made my server very upset. I asked: "how old was this person and where did they come from?" The first answer was that the person was late thirties, maybe forty. The second answer was that the patron was from Southern Florida. Everyone sees the world though his or her own perspective. For someone aged forty, this latest downturn is likely the first that they have had to deal with personally. They have no real personal comparison for measuring this downturn against some other downturn. The second is that the person came from Southern Florida, where housing prices are still dropping, job recovery is abysmal and no end of bad times seems to be in sight. It's no wonder this patron was seeing the dark side of the economy. I asked my server if things were better now than in November of 2008, and were they better than a year ago? The answer to both questions was that things were in fact better. The next question I asked was "do you think things will be better a year from now or worse?" After some thought, the answer was "things will be better!" Perhaps too often we are brought down by the negative thoughts of others without addressing our own perspective on what is happening. A year ago, there was virtually no job growth. Now we are creating about 200,000 jobs a month. A year ago, home sales were almost nonexistent and housing prices were falling all over the country. Now in many places home sales are happening and prices are stabilizing. A year ago, the consumer was barely spending and now spending has picked up. Much of the cash stimulus that the Federal Reserve has pumped into the economy will likely not have its full impact till the end of the third quarter through fourth quarter of this year. I think we as Americans want instant gratification and would like to see the economy back the way it was in early 2007. We have a way to go to beat down unemployment and to see the housing market back to "normal", but we seem to be moving in the right direction, though slowly. At least that is my perspective. Ed Mallon

The Media at Work

2011-06-07T11:10:00.000-07:00

I rarely look at TV during the day, but last Friday I walked into a room where a financial news program was the focus of attention. The stock market had been down on the two previous days and it was dropping significantly on Friday. The talking heads called in their various experts, all of whom agreed that the bad news out there meant the market was doomed! One commentator asked: “Is this the start of a big bear market?” to which the “expert” responded, “It sure looks that way!” Sorry, I don’t buy it. On Monday, one of my longstanding clients called in to ask if he should sell his stock positions because the bear market had started. In questioning him, I discovered that he is an avid fan of free financial news programs and owed his depressed state of mind to watching this chatter on television. Because the weather was so fine, I thought he should turn off the TV and go for a nice walk outside. It’s addictive to watch television news programs because, for the sake of ad revenue, they do all they can to keep you watching. Back in March, these same programs were telling us how rosy everything looked. Now we are being told the economy looks awful. I indicated in my April newsletter that I expected a market correction and that this might be the impetus to create more demand and move the market much higher. Well, here we are with a market correction, still in a bull market, and now it’s time for demand to pick up. In the beginning of the year, I indicated that there would be a gradual change in the economy, which is what is taking place. The economy, like the stock market, does not go up in a nice smooth fashion, but rather moves in fits and starts. Being patient pays off in the long run! Ed Mallon

Reducing Momentum

2011-05-05T11:43:00.000-07:00

It seems to me, that the economy and the stock market are like a giant pendulum swinging back and forth; first too far one way, and then too far in the other, with no real middle ground. Earlier this year, signs pointed to a rising economy that was moving much faster than most economists had predicted. The unemployment rate was sinking, the number of new jobless claims was trending down and new job growth was significant. Corporate earnings for the first three months of the year either met or beat the consensus expectations. On this news, the stock market began taking off in the later part of March and through most of April. As we enter early May, a reevaluation of where the economy is headed is taking place. Where the ideal for new unemployment claims was headed close to the magic 375,000 mark or below, which would indicate job growth, the recent four week average is now at 431,000, a jump of 21% in the past four weeks. The service sector that employs about 90% of the work force slowed for the second straight month. The current expectation for new jobs created has fallen from a week ago. All of this is beginning to drag the stock market down. The question in my mind is: Has the pendulum begun to swing in a negative direction or was the perception of how far it had gone in a positive direction overstated? I believe the case is the latter; that we are still on a positive course but one that corresponds more closely to some of the longer term projections made last year. We were bound to see dips along the way to a better economy. It would be wrong to think everything was suddenly going to be “all better.” The economy is coming out of the worst period since the great depression. Housing prices still do not appear to have bottomed out in many places. Commodity price increases got ahead of themselves. Speculators, who believed the world economy would grow at a fast rate, pushed commodity prices up, and are now seeing them collapse, as the world economy appears to be slowing down. Bear in mind that, at the tail end of last year, predictions were that unemployment would remain over 9% through the end of 2011 and would likely top 10% for a portion of the year. Unemployment is currently at 8.8%; not great but a whole lot better than expected. Perhaps the pendulum is slowing a bit, but it is also likely that stock market investors, commodity speculators and others just jumped the gun on how they interpreted the recent economy. Slow and easy seems to be working very nicely, thank you. The municipal bonds that no one wanted three months ago are desirable again, and inflation fears are subsiding, making corporate bonds and government bonds more stable. Now let’s see what we can do about oil prices! Ed Mallon

The Toilet Paper Caper

2011-04-13T12:03:00.001-07:00

We don’t like to talk about it, but most of us use toilet paper. It’s one of those things you don’t want running out. We take TP for granted. For years I found the inner cardboard fit nicely on the TP holder. Then I started to notice that the paper seemed to wiggle a bit in the holder. Then it began to seem that the holder had shrunk. I realized that what was happening is that the size of the cardboard holder of the paper was becoming larger. By golly, when I looked, I found the number of sheets of paper on a roll had been reduced. To the eye, the roll seemed unchanged, but it was changed. I noticed this in passing and I also began to notice that the orange juice container was the same size with less product, the coffee bag looked the same but had fewer ounces of coffee, etc. Yesterday, however, the toilet paper caper moved to a new level. While up until now the paper fit exactly into its space, suddenly there was a lot more room around it. Not only was the cardboard roll larger, the width of the roll had shrunk! The next step will be to introduce a new, higher priced, larger roll of toilet paper, that will look like the old roll with a marketing strategy telling me it is Newer, Bigger, Better and overall less expensive! Why is this relevant? As commodity prices have increased, businesses find themselves in a tight spot. They want to keep their profit margins up but they don’t want to raise prices for fear that consumers will not use their products. With the price of oil rising, the cost of gas is increasing, and therefore the cost of transportation is higher, too. We are seeing how insidious inflation can be, even when overall it does not appear to be a problem. Consumer income has not been growing, but consumers are forced to pay more for staples, leaving less discretionary income. If this continues, it could have a negative impact on the growth of the U.S. The key to growth is more money in the hands of consumers for discretionary spending. Ed Mallon

Odd Things - March 31, 2011

2011-04-01T08:20:00.000-07:00

Sometimes I see things that strike me as odd. Today is opening day for baseball. Doesn’t seem to make sense, to me, that baseball would begin when the weather, in most of the country, is not warm and sunny. On March 10th, the front page of the Wall Street Journal had two articles next to each other. First was “Discovery’s Last Flight Caps Era in Space Exploration” and next to it “Deficit Proposal Picks Up New Allies.” Seems that only yesterday we were “investing” in space exploration to bring about new innovation here on earth, and oddly, now it’s gone. Recent reaction to continuing drops in job losses and increases in job creation has been mixed. At 10 a.m. this morning, the “Jobs Report” article on MSN Money noted that the DJIA was down because of the report. By the time the “Strong Jobs Report” (same report) was issued by MSN Money at 12:26 p.m., the DJIA was up +87, also noted because of the jobs report. As I was looking at this new posting it was 2:30 p.m. and the DJIA was down again. Seemed odd to me and I wondered if the same report would be renamed again based on how the DJIA finished the day; and it was, to "Lack Luster Jobs Report." So here is the thing: the economy appears to be improving, but what is really happening with the stock market? I like to follow the S&P 500; seems to me that more stocks in the index make it a better gauge of what is happening. On December 31, 2011, the S&P 500 closed at 1257.64. On March 16, 2011, after going up and down for many weeks, it stood at 1256.88 (a slight loss). Now we are at the end of the first quarter of 2011 and the S&P 500 is up about 5.6% since March 16th. It all seems odd to me, but I am happy it is back up. Ed Mallon

Japan 3-11

2011-03-14T13:20:00.000-07:00

I couldn’t help thinking, as I watched television this past Friday, that the date was reminiscent of 9-11. The pictures coming from Japan showed devastation and ruin that I knew would result in more than the 40 to 60 deaths that were being discussed at the time. To me, it was in some ways like watching the twin towers coming down all over again. This time, it was Mother Nature reminding us of how precious life is and how delicate the balance under which we all live. We have friends who have loved ones in Japan, we know of military personnel stationed there, and then there are all the people we don’t know who are scared and worried. The emotional impact is chilling! This destruction will have an economic impact for some time to come. Today I noted that the price of oil was receding, stock prices were dropping, and there was a sense that there was not enough information yet to determine what was really happening. This is the point where attitude and fortitude come into play. As bad as it is, we human beings gather ourselves back up, reorganize and move forward. This will happen in Japan. As difficult as it is, they will rebuild. We will help them rebuild. Ed Mallon

A Breath of Fresh Air

2011-03-07T08:27:00.000-08:00

For quite some time, we have been waiting for the weekly new unemployment filings to go below 400,000. Even more important is to see the four-week average go below 400,000. For the week ending February 26th, the Labor Department reported the weekly new filings were 368,000 and the four-week average is 388,000. In addition, continuing jobless claims--people who have received benefits for more than a week--fell by 59,000 to 3.77 million. These are all positives on the job front. What we really want to see, however, is new job creation! Well, this too has been a positive. To absorb new workers entering the workforce, the economy needs to create about 100,000 jobs, on average, every month. Since November of 2010, the average is 120,000! The momentum is picking up, with 192,000 jobs added in February. The doom and gloom folks will point out that the number of people employed is still 7.5 million below the end of 2007, but I believe the trend is your friend and in this case the trend is going in the right direction. Hooray! Ed Mallon

Is a Pullback Imminent?

2011-02-18T12:56:00.000-08:00

The stock market has been remarkable since the early part of this year. It has risen, with a few pauses, but the direction has certainly been positive. I think we are in a bull market, and still in the first leg of that bull market. The difficulty I am having is that such an uninterrupted expansion with fewer sellers and less demand means that if, for some reason, more sellers begin to show up, demand will likely not support current prices. Since January 29th, when the NYSE 10-Day Moving Average of volume was 4.9 billion, it has dropped about 20% to yesterday, February 17th, when it reached 4.1 billion. Volume should be expanding to support a stock market rally. As I have said previously, I believe we will see a correction with a buying opportunity. Ed Mallon

Market Correction

2011-01-31T06:21:00.000-08:00

When I did my “Outlook for 2011” paper, I did so thinking that a stock market correction would occur sometime during January. I therefore did not want to make any equity changes until that happened. As I waited, the technical factors of the stock market appeared to grow weaker, with the number of stocks above their 10-day and 30-day moving averages dropping. Short term demand also seemed to be dropping. Both of these are signs that the market was becoming more selective and was losing momentum. It was clear that a shortfall of earnings or a change in world affairs could have a marked impact on the market. The unrest in the Middle East may be just the thing to instigate the market correction. I believe that the correction could be in the area of 5% to 7% from the S&P 500 current high of 1299. I would not sell equity investments already in place (because I could be wrong) but I have been unwilling to add to equity positions for our clients until this occurs. I still believe that, barring a major incident or a reversal of economic news, we are in a bull market that will progress much farther. Ed Mallon

Positive Vibes!

2010-12-21T11:01:00.000-08:00

With a new year approaching, it is time to reflect briefly on this past year and look ahead. Let’s first consider bonds and how they reacted during the year. With a drive to reduce interest rates by the Federal Reserve Board (FRB), we saw short-term interest rates approach 0% and longer-term rates drop to new 30-year lows, thereby increasing the value of bonds. This situation dominated for most of the year until the FRB decided that they wanted to see a higher rate of inflation and began dumping money into the economy in November. This has resulted in interest rates rising and the value of bonds decreasing in value. Assuming that the FRB continues in this vein, moving more fixed investments into shorter duration positions--where the risk of inflation is lower but the returns are also lower--will be necessary. This will be good news to stock prices that should advance in 2011, as investors look for higher returns and leave bonds to invest in stocks. Stocks also have the attribute of tending to move, over time, up with inflation. In 2010, stocks made progress in price increases, but with a great deal of volatility. If we look at the gain in the S&P 500 from the close on January 4, 2010 until the close on December 20th, we see the index move from 1144.98 to 1247.08, or about 6.3% gain for the year. Not great, but not bad either. Stomaching what was happening during the year was difficult. With the S&P falling from the beginning of the year to 1022.58 at the close on June 28, or a drop of about 10.7%, some investors found it difficult to hang in during such a large correction! Currently, the stock market has been moving up and is likely overbought (prices too high). A small correction in the range of perhaps 2% is likely over the short run, but we are in a bull market that still appears to have a long way to go. In summary, it appears that investing in bonds with maturities that go out more than 5 years could be a bad idea in 2011 if inflation increases, but investing in stocks will likely be a good idea, assuming that we do not have any major domestic or international incidents. Many investors became frightened during 2007 through 2009 and went very conservative with their portfolios. During 2009 and again in 2010, the conservative investor did well, as bonds reached new 30 year lows. It appears that this will not be the case in 2011 as the bonds may lose value or achieve small gains. Investors need to review their willingness to take risks and consider reevaluating their risk profiles. I would like to take this opportunity to wish you a healthy and invigorating New Year! Ed Mallon

To Tax or Not to Tax?

2010-12-13T09:20:00.000-08:00

The burning question in Washington, currently, is about the Bush-era tax cuts. Some say continue for all, others say continue for all but the rich, and others say don’t continue any of the cuts. We are spending about $1.2 trillion a year more than the federal government is taking in from taxes. I may not have my calculations correct, but I believe that, by letting the Bush tax cuts expire, we will generate about $200 billion of added revenue each year. That still leaves us will a $1 trillion shortfall, which suggests that spending must be cut substantially as well. The reason we hear most often for not allowing the tax cuts to expire is that spending by consumers would be cut (less money to spend) and the economy could slow down. The same rationale is given for extending the federal job loss benefits for an additional 13 months, which is another big expense. Recent studies have pointed out that some of the increasing joblessness is caused by the continued extension of jobless benefits, which has allowed people to hold off getting a job for a lengthy period of time, and during that time, their job skills erode. As I look at the substantial sacrifices that the people in Greece, Ireland, Spain, and Portugal are having to make to get their countries back to financial stability, I keep thinking that we need to move quickly to avoid taking draconian measures later! None of us likes taxes or cutbacks on entitlements, but without financial stability, life as we know it in the U.S. will change significantly. In looking at the suggestions of the bipartisan deficit reduction committee that was established by President Obama, it seemed to me the entire document should be adopted! My burning question is: can the politicians put politics aside and do what is necessary for the long-term economic health of our country? Our founding fathers sacrificed to put us on the road to greatness. Let’s not exit that road now. Ed Mallon

Gratitude!

2010-11-23T10:56:00.001-08:00

I was looking at the last section of the Wall Street Journal this morning and on the front page of section D they had an article about Grateful People. They indicated that grateful people are happier and healthier. Further it indicated that they have more energy, are more optimistic, less likely to be depressed, earn more money, sleep soundly and have greater resistance to viral infections. Wow! First, it made me stop and think of the past two years. In November of 2008 it seemed like the world was in a melt down and everything was off track. By November of 2009 things had improved and we didn’t have that feeling of panic of the prior year but were still very worried and troubled. This November it seems people are finally coming out of their shells, looking around and feeling a bit more normal. It seems “normal” has changed though. People are more careful with their spending and don’t want to take on more debt. Many people are still out of work and for them it is difficult to feel grateful. What I think we all can feel this Thanksgiving is gratitude. Gratitude for living in this country, having friends and family, for the food we eat, for the roof over our head and the clothing we wear. Sometimes we get carried away and think that what we “want” is what we “need”. The vast majority of us can be grateful that our daily needs are met. If we stay away from envy and desire we can truly be grateful for what we have. We can show gratitude by sharing what we do have with others and that too will make us happy. Thanksgiving to me is about gratitude and sharing. I am grateful for all of my family, friends and clients. Thank you all for letting me be a part of your lives. Happy Thanksgiving! Ed Mallon

Correction!

2010-11-11T11:11:00.000-08:00

It appears to me at this time that a correction in the stock market is imminent. The condition I believe we are seeing is similar to the mid-March to mid-April period this year. At that time, the market seemed to be overbought and ahead of where it should have been. That correction, in hindsight, appears to have been a mid-bull-market correction, which is usually a correction of 10% or more, as was that correction. It also lasted about four months. The coming type of correction is usually more of a modest correction of 2% to 5%. I would not be surprised to see the S&P 500 drop to the 1160 range. It should be short-lived. This is a healthy event for the market, as the correction should lead to a longer-term healthy market advance in an ongoing bull market. All and all the skeptics are still worried about the direction of the economy, but it seems to me to be advancing, though modestly. Ed Mallon

It's a Fright!

2010-10-26T12:19:00.000-07:00

Yes, it's that time of year when the ghosts and goblins come out and scare us. You turn on the TV and there they are, looking right out at you with terrifying faces. The scary stuff you get in the mail isn't so bad because you can just look at it, know what it is and throw it out. Underlying all of this are people who are likely quite ordinary, and in normal times are probably not that scary. But here we are with a week until election day and the airwaves and mail is dominated by negative ads. As a nation, we have historically been optimists, looking forward to good things in the future. If you really believe all the negative ads, then none of the candidates for any office is any good! Have we become such pessimists with negative attitudes that we have brought this frightful development on ourselves? I don't know, but I assume the negative ads work to bring in votes. Early on, I decided personally that if a candidate did negative advertising, I would just not vote for them! Well, if I stuck to my decision, I would not be able to vote for anyone who is running. To me, it is scary that election day is only two days after Halloween. Could a candidate win public office by simply stating their position on issues? A friend of mine ran for public office a couple of years ago. His advertising was positive, explaining why he was running and for what he stood. He did not attack his opponent and spent a great deal of time going out and meeting the people. Near the election, I received an attack ad against my friend’s opponent in the mail. I was surprised and asked him about it. He had not seen the ad but had several calls about the ad. Apparently, the state party under which he was running did the ad. Because it is not legal to coordinate such advertising with the candidate, they just did the negative ad and sent it out. He called his opponent and apologized, but the damage was done. For the record, I don't like nasty and would like it stopped! Ed Mallon

News from the Front

2010-10-08T07:56:00.001-07:00

Today was the big day when the U.S. jobs report for September came out. Rampant speculation led up to today on the level of job creation or lack thereof in the economy. As part of the report, the Labor Department reported that they had overstated the jobs created from April 2009 through March of 2010 by 366,000. This is a remarkable admission in itself, because even with these numbers, job creation looked dismal. The consensus leading up to the announcement was that, net, no new jobs would have been created. The report indicated that for the fourth month in a row, the economy shed jobs. While this is not good, much is to be blamed on federal and local governments that shed 159,000 jobs, about 77,000 of which were temporary jobs for the decennial census. The good news to me was the fact that the private services sector employment figures rose by 86,000 after rising 83,000 in August. In addition, temporary help services, a good gauge of permanent hiring, rose 16,900 after a rise in August of 17,700. On another front yesterday, the Labor Department announced that the initial claims figure for state unemployment benefits was 445,000, a drop of 11,000 from the previous week. The four-week average of new jobless claims fell 3,000 to 455,750. The trend here is good, with new claims under 450,000, but the four-week average is still over 450,000, and that needs to drop. Clearly, the major issue facing the U.S. at this time is jobs. This is not a harbinger of good things for the Democrats in the House or Senate. Lack of jobs means more pain and less consumer confidence. The Federal Reserve, because of the jobs report, will likely begin a stimulus program of their own. Back in December of 2008, the Fed dropped the overnight interest rate to near zero. Since then, it has pumped about $1.7 trillion into the economy by buying mortgage-related and government bonds. It seems likely now that they will add an addition $500 billion of purchases. The Fed next meets on Election Day, strange as that may seem. It appears that the idea of stimulus from the Fed sits well with Wall Street and has been driving the stock market up for the last number of weeks. Had the jobs report been better, the Fed would not be likely to increase the stimulus and the market would have retreated. Like Alice might see in Wonderland, a good jobs report is bad and a bad jobs report is good! I think we are moving up a long hill, even if it is slowly. Ed Mallon

The BK Index

2010-09-23T06:21:00.000-07:00

Shock…that is all I felt when I saw the BK index soar last week. As background, I must remind you that the government indicated last week that, during the month of August, “core inflation” (accounting by the U.S. Government that does not include food or energy costs, but is used to calculate the COLA benefits for things like Social Security) was flat during the month. They did indicate that the “inflation rate” went up by 0.3% for an annualized rate of 3.6%. At the time, I didn’t think much about the statement because everything I had been reading indicated that inflation was “under control” and the worry was about possible deflation. Now back to the BK Index. I am a creature of habit, as my wife will tell anyone. When I leave my Denver office to come home I always stop at a Burger King on the way to the airport. I always buy a Whopper Junior with cheese, no pickle, at this same Burger King where they give me a free soda (no age disclosure). The cost of this meal has always been $1.35 ($1.25 for the meal plus 10 cents tax). Last week I went into my Burger King, ordered my Whopper Junior with cheese and was told my bill was $1.72! What? There must be a mistake! No mistake, I was told. The week before, prices had been raised at BK, and the Whopper Junior, which had been a mere $1 meal, was now $1.29, to add cheese was now 30 cents instead of 25 cents, and to make matters worse, the tax on my meal had gone up from 10 cents to 13 cents! As you read this I know what you are thinking: it’s only a burger and it’s only an additional 37 cents and he is still getting his free soda. True enough, but it is an increase of 27%. For the state of Colorado, it is an increase of 30%. I was truly shocked and began to wonder if something was happening in September that was being missed by everyone else. To go to the other end of the spectrum, I looked at the MB Index (Mercedes Benz) and discovered that the price on their bread and butter E 350 had gone up by 3.3% for the 2011 model year. Finally, in desperation, I checked the BB Index (Brooks Brothers). They always send me 25% off coupons to buy at their outlet store in Kittery, Maine. Not so for the latest coupons, which are only 15% off. That means the dress shirt that was $37.50 before would now cost me $42.50 or an increase of 13%. So I ask you, is inflation beginning to creep up on us, or am I being too selective? Personally, I think it is time for the Federal Reserve to signal that they are going to start inching up the Fed Funds rate 0.25% at each of their next meetings and get it up to at least 1%. Being careful and signaling what they are doing will have a mild effect on the economy, but will help them be in a better position if inflation heats up. Ed Mallon

Hey, Wait for Me!

2010-09-15T06:29:00.001-07:00

You might be wondering where the stock market is going these days. As of the close on September 13th, the DJIA had gained 5.3% since August 31st while the S&P 500 was up 7% and the NASDAQ was up 8.1%. My, what is going on? Let's start by understanding that August was a very poor month for the market. To put it in perspective, the S&P 500 was down 6.8% in August. What we have seen, therefore, is a move back to where the market was at the beginning of August. This is not a bad thing; it’s just that you need to remember we don't have a runaway train on our hands! The news has been good. The private sector added about 67,000 new jobs in August. New unemployment claims last week were 451,000 vs. 472,000 the week before (we are looking for that number to go below 450,000 and will be happier at 400,000 or lower). The economy appears to have grown by about 2.85% from the end of September 2009, which is not great, but it is growth. Today, retail sales were reported to be up, which was totally unexpected. In addition, the winds of positive tax reform appear to be blowing in the right direction. The possible large increase in taxes in 2011 has weighed heavily on the markets. The idea of 100% write-off of new plant and equipment investment through next year sits well with me. I think its biggest impact is on large corporations that have lots of surplus cash to spend. The trickle down of this to smaller businesses, which will manufacture all or parts of the plant and equipment, is good. The one bone of contention seems to be taxes on those who earn more than $250,000 each year. The implication is that these are the "fat cats" but history shows us the "fat cats" can always figure a way out of paying taxes. The real burden of this measure once again falls on small business owners who have been massacred during this downturn with little or no help from the government. All in all, the economy is looking better, consumer confidence may be gaining, and the likelihood of a "double dip" is looking far less likely. So how do I feel about the market? Short term, I think it is too high. September is notoriously a bad month for the stock market as investors start to worry about the all-important third quarter earnings. I think that, between now and the middle of October, we may hit a rough spot or two. Looking out to the mid term and long term, I think we are still in a bull market that is going through a correction. Ed Mallon

Jobs, Jobs, Jobs! Revisited

2010-08-20T08:11:00.001-07:00

In my April 5, 2010 blog, I indicated that the jobs picture seemed to be turning around. At that time, the new jobless claims had dropped below the magical 450,000 count and a trend downward seemed to be developing. In addition, my expectation was that job creation would pick up substantially during the second quarter in a manner similar to that of the second quarter of 1975. To put it mildly, this did not happen. The new claims for the past week exceeded 500,000. The trend that had been favorable in April and early May has been reversed and is not looking very good. New jobs formation that was very strong in April petered out in May and has not recovered any meaningful strength. This decline can be attributed to a number of reasons. The first is the sovereign debt problem that began with Greece in the later part of April and then spread to Spain, Portugal, Ireland, and others. As thought, the “other shoe” had been dropped and liquidity in the markets began to dry up. A flight to high quality, such as U.S. Treasury Bills, followed. While the U.S. House of Representatives was able to pass a jobs bill, the Senate has not addressed the bill and is unable to get much of anything done. Increasingly, the likelihood of Congress not acting on tax reform is looming large. Without corrective action the tax rates will return to the higher levels of 2001. In particular, the increase in taxes for dividends and capital gains is weighing heavily on business. It is difficult to tell what the “deal” is since Washington is giving no clear direction. Small banks that traditionally fund small businesses are reluctant to make business loans. Small businesses, even if loans were available, are reluctant to expand because they cannot figure out what the “deal” is on taxes. A small business is a business with fewer than 500 employees. In 2004 the Small Business Administration, Office of Advocacy, indicated that there were 17,000 large businesses, while 24.7 million small businesses represented 99.9% of all the businesses in the United States. While these numbers seem impressive, it should be noted that only 5.7 million small businesses actually had employees. Imagine if each of the small businesses with employees added one more person! I think small business, not large business, needs to be the target to create jobs and get the economy moving again. Ed Mallon

What are American's Buying?

2010-07-15T08:57:00.000-07:00

The Commerce Department reported today that retail sales, spending by consumers, dropped 0.5% in June. On the surface, this might appear to be bad news. As with many things in the economy, it depends on how you count the numbers. If you exclude autos (down 2.3%) and gasoline (where the price dropped, creating less spending on the same volume of sales) then retail sales grew by 0.1%. This is not the growth rate we would like to see, but it is growth. So where are Americans spending? Department store sales went up 1.1%, appliance sales up 1.3% and specialty store sales up 0.6%. Now add to this more upbeat view the International Council of Shopping Centers' Index (this is comprised of the largest retailers) which showed a 3% gain in sales for the month, compared to the same month a year ago, and you might not be quite as concerned as the initial report would indicate. The Federal Reserve along with the IMF have indicated that they expect the growth in the second half of the year to be slower than the first half (3% vs. 3.5%). Instead of using percentages, let's see what happens using real money. If you had sales last year of $100 monthly, then your sales in the first half of the year averaged 101.75 followed by an average of $103.53, would you say this is progress? It appears to me that the economy is growing, albeit slower than we would like. In order to get faster growth, the federal government could be clearer about what they are doing so that small businesses and consumers feel more confident. This does not mean spending lots of money, but being clearer on tax, estate and business policies, all of which are unclear at this time. If small businesses understood the "deal" they might begin hiring, which in turn would lead to fewer unemployed, which would lead to consumer confidence. Making banking credit available to small businesses so they don't have to use their credit cards, at high interest rates, to fund their cash flow needs would also be helpful. Ed Mallon

Uncertainty

2010-06-29T10:56:00.000-07:00

It seems that the stock market, the bond market and the world are going through a period of uncertainty. Recently, we have seen a new flight to US government bonds as a safe haven for money from around the world. It is reassuring that the world feels the US is a safe place to have money. The problem seems to be that we who live in the US don’t have the same confidence in our economy. As the second quarter ends, there is uncertainty as to how the economy has performed overall. We have heard this week that consumer spending is up. Corporate spending is up. Productivity is up. On the other hand this Friday we will find out what is happening with unemployment, which has not improved of late, and perhaps get some preliminary numbers on new job creation for June. The uncertainty stems from an attempt to discern if the economy is moving forward with greater profits from companies and more confidence from the consumer, or is stumbling. As of yesterday, the multiple on one year forward earnings for the S&P 500 was 13, where normal would be 18. This discrepancy gives us a clear sign of how uncertain the feeling is about the coming year. We will know a lot more as earnings are reported over the next several weeks. Ed

Flag Day

2010-06-07T06:52:00.000-07:00

Each year we have Flag Day and it falls on June 14th. I don’t know why, but I always seem to remember Flag Day. Flag Day commemorates the adoption of the United States Flag on June 14, 1777. I’m not a big history buff, but I do remember this piece of history. It tends to make me remember all of the men and women who have gone before us and have done so much to grow and preserve our freedom and way of life. Most of us, or our families, originally came to the U.S. as foreigners. This has been and remains a land of opportunity. As I read about the turmoil in the world and the economic problems, I can’t help but think how lucky we are to be living in the United States. Yes, we too have our problems, but by comparison we have so much more opportunity, coupled with freedom, than anywhere else in the world. It is up to us to take advantage of this opportunity and freedom and use it wisely. This past month and a half have been difficult, with unemployment continuing its march upward, the oil spill in the Gulf, the turbulence in the stock market, and many other issues. Even so, most of us still go to bed at night well fed and feeling secure. What do you think the expectations of our founding fathers were, back on June 14, 1777? Ed

Dow Drops 376.36!

2010-05-21T11:11:00.001-07:00

Yesterday, the DJIA had a major drop in value, as did all of the other exchanges. I generally like to use the S&P 500 as the base for reviewing market activity. Yesterday it was down the most of all the exchanges, with a 3.9% drop to 1071.59. What is interesting is that the S&P 500 has dropped from its peak, on April 23, about 12%. What does all of this mean? For the short run it likely means the markets will move up for the next 2 to 7 days as that is what generally happens after a 90+% down day for stocks. Because the volume yesterday on the NYSE was 8.5 billion and the market moved down dramatically it means there was an ample supply of sellers who were likely doing some profit taking. It also means the market, at some future time, will test these lows. Given all of this data what does it mean long term? First of all, I believe this is the correction that I've been anticipating since the middle of March as the market was becoming overbought. I don't think this is a return to a Bear market. By mid April it was very apparent to anyone with an understanding of the market that it was overbought and a correction was coming sooner or later. The actual reason for the correction generally is meaningless in my opinion. In the early part of yesterday the drop was being blamed on the falling euro but the euro climbed from 1.21 to 1.25 so that was not it. Then it was the job data that came out showing new layoffs of over 470,000 instead of the 440,000 that was anticipated. Good story, but I don't think it holds long-term weight since the new job creation in April was 290,000 while what was anticipated was 180,000. Earnings data for corporations look good, consumer spending is OK and inflation does not seem to be an issue. The stock market is a leading indicator. This blip downward would indicate that the rosy picture that Wall Street saw in mid-March is being reevaluated. While the economy is improving it will take some time before it is sound again. In 1990, when we had a recession, the big reason was the failing productivity level in the US. It took the US five years to get back on top of worldwide productivity but it did what was necessary. The darkest cloud over the US currently is the government’s interference with the entrepreneurial spirit of this country. There are over 25 million small businesses in America and they are the heart of the economy. They have to have confidence in the economy, government spending and legislation in order to be willing to expand. Some of the new legislation intended for large corporations is falling on the small businesses both in regulation and more so in taxes proposed in the new tax bill. If this continues it could stall the economy and change the direction of the stock market. Ed Mallon

A Market Correction or a New Bear Market?

2010-05-10T11:55:00.000-07:00

After the events of the past two years, it is understandable that the markets are so volatile. As I have indicated previously, the expectation of a market correction has been in the works since the latter part of March and most certainly after mid-April. My own expectation was for a brief correction of about 7%. When the markets get to a point where they are overbought, then a correction eventually comes. The question is when something will happen and what will trigger the change. In this case, the debt of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) was the catalyst worldwide to bring about a rapid descent. At the beginning of 2010, the S&P 500 opened at 1117 and by April 23rd it had reached 1217, up 100 points or almost 10%. Between April 24th and May 7th,the market went down to 1111 for a drop of about 8.7% and below the opening at the beginning of the year. The bond market acted in a similar fashion with interest rates decreasing until the scare from the PIIGS moved interest rates up and the value of bonds down. The action over the weekend to bolster the euro, with a commitment of $1 trillion, was a bold and needed move to keep the financial markets and economies of the world moving away from the recession. The impact worldwide has been dramatic and good. But how about the fundamentals? So far, 381 companies that make up the S&P 500 have reported earnings, and of these 77% have topped estimates. The S&P 500 index is trading at 13.5 times forecasts for earnings during the next four quarters while the long term average for this multiple is 16.4%. This would imply that there is still room for stock price growth. All of this was before Friday's meltdown. If the PIIGS situation remains stable, then it is likely the markets will resume their path higher. I am not complacent at this time because we in the US need to do something about our own Federal red ink! I am hopeful that we will see the light and move to reduce the deficit spending once the broad economy is out of the woods. For now, we continue on a positive path with very large job creation in April (I was thinking 200,000 but instead it was 290,000), inventories being replenished and businesses increasing spending. The signs for a recovery are looking good! Ed

Giddy Yap!

2010-04-26T09:18:00.001-07:00

In my recent newsletter I had indicated that I thought the picture for unemployment would improve. I think this is good news: the state unemployment benefit claims fell by 40,000 this past week, and the Federal claims fell by 500,000. This means, based on my calculations, the following: the unemployment based on state claims fell from 9.7% to 9.6% and, more meaningful, the federal claims fell from 12.5% to 11.3%. Overall, the jobless rate, while still very high, moved from over 22% to 20.9%. I will be happy to see this continue. In another bold move, housing sales were up 27% in March, the highest in 47 years. It is likely that April will also see housing sales rise, because the requirement to have an executed sales contract, to get the federal tax credit for a home purchase, expires at the end of this month. It appears we are moving forward. Ed

Jobs, Jobs, Jobs!

2010-04-05T10:52:00.000-07:00

Back in my November 3, 2009 blog, I indicated that I thought this recession (depression is more like it for the number of people out of work … but more on that later) was very similar in some ways to the period of 1973-74, followed by the recovery of 1975. My remark was specific to my belief that we would not see a lowering of job losses and increasing jobs creation until March of 2010. At the beginning of March, I again commented on my belief as the Labor Department reported the four-week rolling average of job losses was 470,750. It now appears that March was a turning point. The four-week rolling average of job losses, as of Thursday April 1st, was 447,250, just below the 450,000 that most economists were seeking. More importantly, the number of new jobs created, according to the Labor Department, was 162,000. This was the biggest gain since December of 2007. What I like is that, according to their report, private employers created most of these jobs. I must say, however, on a negative note, that while unemployment remains at 9.7% as the government counts the data, I count it somewhat differently. The 9.7% represents 4.66 million people who are receiving state benefits, but not the 6 million people who are on extended federal benefits that add up to an additional 73 weeks. My math says that the additional 6 million people represent 12.5% in addition to the 9.7%, or over 22% unemployment. This is a big number and most of us know at least one person, or many more, who are currently out of work! Is there hope for the unemployed? I think so. As I’ve also mentioned on several occasions, this recession seems somewhat like the one in the ‘70s. In May of 1975, hiring picked up pace very quickly and expectations of a long period of unemployment were proven wrong. We shall see as this unfolds. Ed Mallon

The Federal Reserve Rules!

2010-03-15T09:26:00.000-07:00

It has been interesting to be able to look back on the economic collapse we have experienced in the past couple of years. While the central government of the U.S. rattled cages, set out on a journey of legislation, and argued about bailout funding the Federal Reserve (Fed) took action. Not only, as it turns out, did they take action, but they took it quickly and decisively. The Fed dramatically lowered short-term interest rates and washed the country with money supply. Last week it was reported that because of their actions, the economy was saved! As far as the bailout money was concerned, even after it was approved, the government was slow at spending it. It helped the economy, but the Fed saved the day! Only a couple of months ago, Congress was on the case of the Fed with the idea of curtailing its power. Now, interestingly, Senator Dodd is proposing financial reform legislation that would give the Fed oversight for the financial markets and instruments not currently regulated by any other part of the government (such as the derivatives that help create this mess). The Fed is not perfect. In making interest-free money available to banks and investment banks during this period, these giants were given the ability to take money from the Fed, paying no interest, and to invest it at interest. The difference, known as the spread, is the profit that the big banks and investment banks were allowed to keep. The nasty part of all of this is that instead of plowing this back into their companies, much of this money was given in the form of outlandish bonuses for the year 2009 and likely will be followed by even more extravagant bonuses in 2010! The Fed is aware of this and is gradually reducing the money supply and charging a modest interest rate. It is the old story that, for the betterment of the country, the big guys will get rich! Long term, we must remember that the people who are on the Fed wield a great deal of power and these are appointed positions still subject to political whims. Ed

Mixed News

2010-03-04T11:57:00.000-08:00

It appears the economy is giving us some very mixed signals these days. Consumer confidence seems to be going down, the Federal Reserve says the economy is edging up but at a very slow rate and Congress still has done nothing with employment legislation. The initial claims for unemployment insurance, which was widely anticipated, showed a drop of 29,000 from the prior week to a seasonally adjusted 469,000. This reversed the big rises of the past two weeks. Still the four week average is 470,750 where it had been down to about 450,000 a couple of months ago. Back in November I had anticipated that we would see a marked decrease in initial claims beginning in March since this is what has happened in the past. We will see as the month progresses. With productivity rising, according to the Department of Labor, in the fourth quarter of last year by 6.9%, it would seem that fewer workers are working more hours. At some point we would expect that with the addition of part time, tempoary and over worked workers companies would once again begin to hire full time employees. In the meantime, the consumer is watchful and curtailing spending and thereby keeping inflation down. The overall economic trend appears to be moving up at a slow pace. Ed

Inflation and Bonds

2010-02-18T11:58:00.001-08:00

Bonds do not generally work well in an inflationary environment. When inflation rises, interest rates also tend to rise. Unfortunately, rising interest rates mean that existing bond values decline. This occurs because an investor can now get a higher interest rate on a new bond than on an older bond. To offset this difference, old bond prices are discounted (reduced) to give investors the same basic rate of return on either old or new bonds. The longer the time to the maturity of the bond, the greater the discount tends to be in the reduction of the bond’s price. This is an area that I have been watching carefully for the past year. In 2009, we were fortunate that interest rates decreased and the value of the bonds increased. This year, it has been a bit of a seesaw, with interest rates fluctuating within a fairly narrow range. In this environment, we have been looking toward moving from very short maturities (60 days to two years) with very low interest to the higher interest on longer-term bonds (average maturity of 4 to 5 years). My confidence in this position comes from seeing core inflation remaining reasonable and consistent. This consistency in the inflation rate should lead to consistent interest rates on longer-term bonds for the next several quarters. The bad news is that the current control of inflation appears to be in large measure because of continuing unemployment and growing layoffs. Overall, the bond market likes stability, and even with the massive federal bond offerings, bonds do seem to be stable. Ed Mallon

Weekly Unemployment Up!

2010-02-04T11:23:00.000-08:00

The weekly number of new people filing claims for unemployment rose today, which was not good news. In many respects, what is worse is the fact that the rolling four-week number has been moving upwards steadily for the past several weeks. On the other hand, productivity was reported today to be up, as employers try to get the max with the least! From past periods when we have had high unemployment, we have generally seen the unemployment rate rise during the first couple of months of the year before beginning a more favorable decline in March. I think that also will be the case this year. The stock market, however, is not showing much foresight these days and is reacting to what I consider to be yesterday’s news about unemployment. Once again, we shall see what we shall see. Ed

What's Happening to the Stock Market?

2010-01-22T13:29:00.000-08:00

I think it is interesting that the recent stock market downturn is being attributed to (take your pick): poor earnings reported for the first quarter? high unemployment? or President Obama’s harsh talk about Wall Street and the banks? I am sure there are more opinions, depending on what news or internet service you happen to listen to. I think the simple truth is that the market is scared! When the stock market doesn’t know what is happening, it gets scared. Short-term reports seem to bode ill for the economy. A longer view, however, reveals evidence to the contrary. Some reports say that early earnings reports are not so good. Today GE, which is considered to be a bellwether company in viewing the overall economy, was expected to post no more than 26 cents per share earnings for the fourth quarter, but instead reported 28 cents per share earnings! Yes, that is a big deal. Most companies have not reported yet and many won’t until sometime in February. As for the unemployment rate, it has been clear for more than six months that the unemployment rate would go to 10% plus and stay there, in all likelihood, for most of 2010. This is not news. The weekly jobless rate went up last week to over 460,000. The best measure of the unemployment rate, however, is the four-week average, which smoothes out the weekly fluctuations. That was 440,450. Illustrating its 19th straight drop, and the lowest four-week average since August 2008. Okay, then, some people think the downturn must be due to President Obama and his hard line talk. Yes, the administration is reeling from the election in Massachusetts this past week and the loss of the 60th Senate seat. But our President is a bright man and knows he has got to get something going on the economic and job fronts. You can’t blame him for tossing some blame at Wall Street, Big Banks and Washington itself since most of the country is disgusted with all three; or for talking about job creation and getting off of the health care legislation that ate up most of his first year in office and didn’t seem to sit well with the populace. What’s important is that he is not changing the way investors invest. My opinion? This is a stock market correction and I think it is but a short stop. The economy continues to improve though more slowly than most of us would like. Ed Mallon

Here Comes Santa Claus!

2009-12-28T08:34:00.000-08:00

First a little bad news: the government revised the third quarter GDP downward from 3.5% growth to 2.2% growth. Notice that it was still growth, and remember that in the second quarter we had negative 0.7% GDP. I believe we will have higher GDP growth reported for the fourth quarter. We have already seen the number of new people losing jobs diminish. Unemployment overall seems to be decreasing. Yesterday it was reported by the Bureau of Labor Statistics that the number of temporary workers being hired has surged. Last month, 52,000 temps were added, greater than the number of jobs created in any other category. This is usually a precursor to full-time hires. These jobs also take people off unemployment. Finally, it was reported today that in November previously-owned home sales rose to 7.4%. At this rate of sales, the country has a supply of about 6.5 months. Yes, the prices have dropped again but by the smallest amount in two years. Overall, the economy seems to be moving upwards. The loss of this past Saturday as a shopping day along the east coast is meaningful, but it may be made up in the aftermath, as consumers are buying. As we head into the end of the year and look to next year, the news seems to be getting brighter. Ed

Wondering and Waiting

2009-12-10T12:25:00.000-08:00

As I look back at the past month I notice that the number of people who are losing their jobs is receding. The overall unemployment numbers are beginning to drop. Earnings reported for the third quarter by large corporations were reasonably good, even if it was through cost cutting and layoffs. The consumer seems to be a bit freer in their spending. While savings rates have dropped since the summer they are still above 4% which I also consider to be a good sign. Finally, banks and government are beginning to talk about loans for small businesses and General Electric Credit is actually advertising the availability of such loans. This is important since small businesses drive most of the jobs in the U.S. and they need a source of credit. All of these tidings seem to bode well for the economy going forward. Nothing appears to be jumping forward at a rapid rate but slow and steady can win the race. I am still waiting and wondering if all of this will hold and I am thankful for the signs we are seeing. Ed Mallon

Happy Thanksgiving News!

2009-11-25T07:55:00.000-08:00

Just in time for Thanksgiving, the Labor Department has given us some good news by announcing that the weekly jobless claims for last week fell to the lowest since the first week of January. The jobless claims dropped to 466,000. As I indicated in my November 13 blog, the number needs to get to about 400,000 to signal a real turning point, but it was a surprise to see the number go below 500,000 for the first time since early January. Another seemingly positive sign is that the number of payroll cuts expected in November is about 145,000 vs. about 190,000 in October. These seem to be trends that are going the right way. Consumer spending also appears to be increasing with the savings rate dropping from 4.6% in September to 4.4% in October. The only issue is that spending is outpacing income growth. Can this be sustained? All and all, it is nice to see positive news even if it is not conclusive.

Unemployed!

2009-11-13T10:39:00.000-08:00

“What is your job?” “Unemployed!” Imagine having to say that for more than a year. Millions of Americans are in this unenviable position. They are waiting for someone--government, big business, anyone-- to do something so they can have jobs. No job often means no health care insurance along with many other issues. How do you feel about yourself when you’re unemployed? For many, it leads to serious depression. The latest statistics say that the unemployment rate is now at 10.2%. This is, of course, misleading because it only includes those individuals who are on state unemployment. If you count Federal unemployment payments, people who have stopped looking and those who have taken lesser positions just to put food on the table, the number is more like 21%. These are just numbers, and are not personal. To the people who are out of work, it is very personal! It hurts! What it all means to me is that we have a lot of hurting Americans. We need to get a jobs program going. For the past month, the Obama administration has become more publicly vocal about the situation and seems to have acknowledged that job creation is now necessary. Congress for now seems mired in the Health Insurance Plan. It must be very frustrating to be unemployed at this time and listening to advisors and economists saying that this may be a “jobless” recovery. It seems to me that the idea that was broached by President Obama several weeks ago, of a tax credit for small and medium sized businesses for hiring people, makes sense. Doing something for the unemployed makes more sense than just preserving jobs. My next concern is with the jobs that have been “preserved” with stimulus money that will not be there in the future. Ultimately we need growth! My belief is that if Americans see job creation, a lowering of the unemployment numbers and a drop to below 400,000 in new weekly unemployment numbers, confidence would begin to be restored and we would move forward at a faster rate that in turn would create jobs. I think the next several weeks will be an important time in finding out about the willingness of consumers to spend money during the holidays. If they spend equal to or greater than last year, we may be headed in the right direction with the economy but not necessarily with jobs. Ed Mallon

The People on the Bus Go Up and Down

2009-11-03T08:01:00.000-08:00

When my children were little and we went traveling they would sing “The People on the Bus Go Up and Down” song. I couldn’t help thinking about this on Friday as October came to an end. During October the market was headed up and down each day. By the end of the month the DJIA was flat, the S&P 500 and NASDAQ had losses and basically nothing much had happened. The municipal bond market did take a bit of a hit during the month as interest trended up and the value of the bonds went down a bit. The announcement last week that GDP went up for the third quarter at a 3.5% annual rate, which was good news, was offset by the thought that this would not continue and was only because of “special Government assistance.” The good news that new weekly unemployment rates were dropping was offset by the total size of the number of people who are unemployed. The lack of new jobs was meet with the administration stating that if they hadn’t acted more jobs would have been lost and that they had managed to save about 650,000 jobs. It all seems to go back and forth. The real answer is that no one knows the real answer. It seems clear that new job creating is needed but the winter months historically are not good for job creating. If you go back to the 1973-1974 recession jobs did not turn up until March. With all of this said it would seem that the fourth quarter of this year may still look reasonably good. The Wall Street Journal reported this morning on their front page that “Jittery Companies Stash Cash.” They went on to point out that big businesses are hoarding money that they could be spending. They also noted the good news that many big companies have money available to hire people, when they are ready. Consumer spending is also down with the consumer also hoarding their money. It will take a sense of confidence in the government and the economy before all of this turns around. The upcoming holiday season may give us a clearer picture as to the confidence level. Ed Mallon

Waiting for Quarterly Results

2009-10-08T12:38:00.000-07:00

This is often an interesting time in the market. It is the period between the end of the third quarter and waiting for the financial results to come in from businesses for the first nine months of the year. It appears that the expectations for improved earnings are running very high. It is clear that the "Cash for Clunkers" program gave a robust push to July and August for auto makers. Retailers are indicating that September was better than what they had expected. The newest job loss numbers released today were also better than expected. All and all, the markets are basking in a very pleasant light. If results come in as expected it will be a good sign for the economy. You always wonder when everything seems to be going better if one item not going according to plan will upset the apple cart. Between now and early November we should get a clearer picture. Ed Mallon

What to do with Cash?

2009-09-30T06:04:00.000-07:00

If there is a recurring theme that I am hearing from my clients, it is this: what do I do with short-term cash? Many have found that their money market account, savings accounts and CDs are paying little or no interest. (If you haven’t looked lately, you might be surprised to see rates on CDs at less than 0.50%). If you invest these funds in some type of long-term investment, you might be facing the prospect of inflation eroding the interest paid and the principal declining in value. The real question, therefore, is “where do I put money that I want to have liquid but get a fair interest rate without taking undue risk?” As investments go, the shorter the term of an investment--from the time you invest until you get your principal back--the lower the risk, if you buy quality! On the other hand, the shorter the term of the investment, in general, the less the interest rate your principal will earn. What I have found this year is that short-term taxable investments are paying little or no interest. This is in large measure because the Federal Reserve (Fed) target for short-term interest rates has been 0%. The Fed gets what it wants! But the Fed does not care about nor does it control the short-term interest on tax-exempt investments. What we have seen so far this year is that a good place to invest for liquidity, quality and a fair interest rate has been short-duration municipal bonds. If this sounds like something you might want to consider, give us a call and we can discuss it. Ed Mallon

Who will Bear the Cost?

2009-09-14T14:01:00.000-07:00

It seems to me that much of the news in September has been "Bad News". It was reported last week, for example, that the U.S. Deficit for the year hit an all time record, well over $1.25 trillion dollars. Last week the dollar hit a new low. Many investors have been looking outside the United States to obtain better rates of return as the Federal Reserve has been targeting a key lending rate of 0% to keep interest rates very low. Earlier in the month it was also reported that the unemployment rate has hit 9.7%. We now have about 14.9 million individuals out of work, according to Christopher S. Rugaber in his September 4th Associated Press article. This does not include those who have taken reduced salaries or lower paying jobs and those who must take furloughs. For some of these individuals, who will bear the cost? For some of these individuals, the unemployment checks are about to end, leaving them in desperate situations. We are also hearing that the "rebound" of the economy may be a "jobless rebound". With all of these reports, it is no wonder that consumers who have jobs have cut back their spending, are saving more and are worried. We have to be thankful for the clunker and new homeowner's programs, as brief as they may be, in motivating consumers to spend. All of the above made me wonder how the Federal Debt will be repaid? It can't be repaid by those who are out of work. We are finding, on an international level, we are losing manufacturing jobs and not getting the new high tech manufacturing jobs because our corporate tax rates are too high (see Business Week Sept 21, 2009, "Can the Future Be Built in America?"). It therefore seems unlikely that increasing corporate taxes is the answer. The answer is that individuals will have to carry the burden of added taxes. For years, we have heard about the widening gap in earnings at the top end. Certainly this top group of earners is the group to go after. One of the problems with this is that the top earners are seeing their incomes declining. According to an article on page 1 of the September 10th issue of the Wall Street Journal, "Income Gap Shrinks in Slump at the Expense of the Wealthy", while the top 1% of tax returns in 2007 accounted for 23.5% of all personal income, it appears this will be reduced to about 15% in 2010. This top 1% of tax returns paid 40.42% of all the taxes collected in 2007 according to The Tax Foundation. To be in this rarified 1%, you had to have had an adjusted gross income of $410,096. The top 5% of tax return filers are also seeing their incomes declining, and in 2007 paid 60.63% of all Federal taxes. These were filers with $160,041 of adjusted earnings. If this group is seeing their earnings coming down, then the taxes collected from them will also come down. A combination of less government spending, higher income taxes and more jobs is likely to be in our future. The good news with all of the above is that there is an awareness of what is happening and a real opportunity to set Federal policy to go after the high tech manufacturing jobs, develop new jobs relating to the environment and move away from high reliance on the financial services sector in creating jobs. The United States has responded in the past and I am sure will do so again. Ed

What to do?

2009-08-31T09:31:00.000-07:00

Many times it seems that “action” is better than no action. When we see things happening around us we want to “do” something. Recently the stock market has moved up quite nicely and you begin to wonder “did I miss the boat?” I do not have a crystal ball but I have been saying for several months that you need to have a game plan that makes sense rather than reacting to the stock market. The game plan I am pursuing is one based more on historical information than on what is happening with the stock market day-to-day. Historically the month of September is the worst month for the stock market. I think this occurs because investors realize that while gimmicks and onetime adjustments (such as lowering employees pay or not buying equipment now that you know you will need later)can work in the short-run you cannot build business profits using these methods. Ultimately, growing profits move stocks higher. The expectations in the first and second quarter for earnings is fairly small. By the time you get to third quarter earnings the expectation is much greater. Third quarter earnings are the last earnings we will see for the year since year-end earnings are not reported till the following year. It seems that the worry about what the third quarter results will show tends to drive the stock market down. Will that happen this year? I don’t know what will happen in the future but I don’t think you want to increase risk in your portfolio at this point in time. Ed Mallon

Stock Performance

2009-08-11T13:23:00.000-07:00

Since the March 9 low in the stock market, the market has risen almost 50%. If you had invested $1,000 at the beginning of 2008 and that fell to $500 by March 9, between then and now you would have gained about $250 (50%) and be back to $750. That is still 25% below where you started, but it’s a lot better than where you were on March 9. This stock market is up 49% in five (5) months. To say that this is unprecedented is to put it mildly. You have to go back to the early 1930s market rally to find when it last happened. Of course, that rally was followed by a decline through 1932 that led to prices being down about 82%. I don’t want to burst anyone’s bubble but it appears to me the stock market is ahead of itself. Consumers account for about 67% of the spending in the economy. Currently, many consumers are out of work. It is unlikely that they will increase their spending. An article in today’s Wall Street Journal, “Debt Burden to Weigh on Stocks,” indicated that: “. . . household indebtedness peaked in 2007 at 132% of disposable income. That was the highest level since the end of WWII and quadruple the 36% of 1952. By the end of March, with families boosting savings, repaying debt and defaulting the ratio had fallen to 124%, a tad lower but still miles from the level of, say 69% in the middle of 1985.(WSJ,pg. C1,08-10-2009)” Consumers are not borrowing but are paying down debt and saving. If that is the case, how is the economy going to grow? How are corporations going to see profits increase? When will companies begin to create new jobs? I have to agree that we are better off now, than, say, last November when things looked bleak. But are we so much better off that the stock market should be up 49%? In a news story today on Bloomberg.com, the reporter indicated that Mark Mobius at Templeton is expecting a 20-30% correction in the market. They also report that Warren Buffett is shifting out of equities and into U.S. corporate bonds and foreign government bonds. These are two very astute investors who manage a lot of money. If the market declines 20 - 30%, it will not be down as much as it was on March 9, but it still would bring us close to that point. If we take the $750 that we now have from our original $1,000, a downturn of say 25% would leave us with $563. Of course, the future will tell all, but for now I would not get carried away buying equities. Ed Mallon

S & P 500 Up 7.5%

2009-07-20T14:04:00.000-07:00

Good News! The S&P 500 is up 7.5% between July 8 and July 17! In a period of about a week and a half we saw the S&P 500 go from 875.07 to 940.31 on recent good news. It is being reported that various aspects of the economy seem to be showing signs of either nearing a bottom or possibly bottoming out. This, it would seem, has pushed the stock market up in a meaningful way in a short period of time. On the flip side of this is the fact that from January 2 of this year through July 17 the S&P 500 has gone from 931.80 to 940.31 or up about 0.9%! So, is the glass half empty or half full? I don’t really know. In looking back on the past month we saw the S&P 500 close at 944.89 on June 11 then go down to 875.07 by July 8 to return to 940.31 on July 17. In other words, the S&P 500 went down 7.4% then went up 7.5%. As this up and down process went on from mid June through this past Friday, the 30 day average volume on the NYSE has been going down. Lower volume is not the normal condition for the beginning of a new bull market. Whatever is going on, this sideways movement of stocks would appear to be containing the trading range with no dramatic current movement either up or down. My expectation for the market this summer has been either no substantial change or a gradual move downward until mid September. The positive surprise has been some of the good earnings reports and the fact that they seem to have had an impact on the market. Perhaps the lack of volume is due to the summer doldrums and investors waiting for the main event: earnings reports for the third quarter! Ed

President Obama's Report Card

2009-07-10T06:29:00.000-07:00

Where's the money? Where are the jobs? Before President Obama's inauguration he seemed to understand that his most critical role as President was to retain and create 600,000 jobs by this summer. He also knew that he needed a stimulus package to help get the economy back in gear! Congress passed a stimulus package in the amount of $787 billion at his request! Well, how has he done? On the job front, it appears that about 150,000 jobs have either been retained or created. This is far short of the 600,000 that his administration had targeted for this summer. As far as the stimulus package is concerned, thus far about $43 billion has been given in temporary tax cuts and $158 billion has been committed for spending around the country, but only about $53 billion has been spent, according to The N.Y. Times! That means of the total of $787 billion available a little over $100 billion has been used. And now his administration is thinking about asking for more stimulus money. With this as a backdrop, according to the Congressional Budget Office, the deficit for this year will hit $1.7 trillion, which is about 12% of Gross Domestic Product and is a far higher deficit, by any measure, than any President since WWII. The President had indicated early in the year that his administration expected the unemployment rate to go as high as 8.5% by the year's end. Unemployment as measured by the Government is at 9.5% now. This only includes those individuals still receiving state benefits and does not include those receiving the added Federal unemployment benefits, or those whose benefits have run out entirely. President Obama now owns these problems. What is going on? It appears the advice he is getting is to grab for all you can during your first year as President. His eye is off the main event. Get the Health Insurance passed, no matter what! Get an environmental law passed. Spend time visiting other countries. Well, I ask, what has happened to the basic issues that needed to be addressed in January and still need to be addressed: jobs and the economy! I don't like being a taxpayer and owner of GM, Chrysler and AIG. Isn't this what President Bush was chastised for when he suggested we should put some of our Social Security Money into stocks? I am an optimist and am hopeful that Mr. Obama, who is a bright and politically savvy guy, will wake up and get back to the basics. If he doesn't, we may be in a real pickle. His ratings are declining and his personal charisma is waning with too much exposure in the media. His own party is starting to turn away from some of his ideas. If this continues, he will lose his ability to be a leader dealing with the real issues of the economy and may wind up looking more like Jimmy Carter than FDR! Those who are out of work, underemployed or scared of what will happen to them the next time there are layoffs want a leader who is working for them and taking care of the economy! To me President Obama's Report Card gets an "IC", incomplete! This is what a student gets when he drops out. Ed

New Values, New Prices!

2009-06-24T11:42:00.001-07:00

It seems at times I'm headed in one direction and suddenly I find myself in a place I had not planned on being. This blog is such a case. As I was reviewing some historic information on the DJIA (started in 1896, the only original stock still in the Average is GE) I began looking at rates of return. I was surprised when I saw a quote from Warren Buffett, commenting on the 5.3% compounded average of the DJIA over the 20th Century, "a wonderful century." This got me wondering about the current compounding rate of the DJIA. It took me awhile to get together all the information I wanted to study but, in summary, the compound average growth rate seems about right. Back at the beginning of 1973, the DJIA was about 1,051.70. If you took that and compounded it at 5.3% you would have a current DJIA of 7,247.44. This seemed familiar and indeed, the DJIA closed on November 20, 2008 at 7,552 and on March 9, 2009 it closed at 6,547, both new lows at the time. At the close of business yesterday, June 23, 2009, the DJIA closed at 8,322 which, based on my starting point, was a 5.7% compounded average. Still in the ballpark. I then used a different benchmark, the closing DJIA for July 1, 1989, which was 2,661. I arrived at this date very scientifically; my computer will only go back 20 years on daily charts. Using my 5.3% compound rate of return, I arrived at 7,662. If I used a rate of 5.7%, I got 8,297, which is very close to yesterday's close. Seemed like 5.7% was a reasonable return overall and compared well with the 5.3% for 100 years. Once I start these things I tend to get hooked, and this was no exception. I took the 1973 starting point of 1,051.70 and the close in October 2007 of 14,165. To get from my starting point to the end point you would have needed a compounded return of about 7.5%. If I used July 1, 1989 as the starting point, I’d need about an 8.4% compound rate of return to get to the October 2007 close. Averages need to be used over long periods of time to be worthwhile, and I'd say 20 years and 36+ years would be a good sample. They show me that the average of 5.3% was greatly exceeded when the stock market hit its high of 14, 165. You may be wondering what all of this means and I have to wonder myself. What I do know is that on June 15th and again on June 22nd we had 90+% down days within the NYSE Operating Companies. This is a very bearish sign when you get two of these within 30 days of each other, let alone 6 days. Usually, after a 90% down day, we see the market go up for 2-7 days. That was not the case following June 15th. Taking this all together, I wonder if the market is about to retrace its steps to the low points noted above of November 20th and March 9th. I also wonder if during a period of excessive leveraging in the markets, prices were raised beyond what was reasonable and perhaps now that we are going through a deleveraging period, we will get a clearer picture of what companies are really worth. We shall see what we shall see. Ed

Bull or Bear?

2009-06-08T13:53:00.000-07:00

When looking at the stock market, some individuals consider themselves to be either bullish or bearish about the market. Their perspective rarely changes, as this is their general sentiment. Putting it a different way, some people are optimistic and some are pessimistic. Many, like me, evaluate the current situation and try to determine if the long-term market trend is up, bullish, or down, bearish. Currently, I am bearish! On November 20th of last year, the market hit a bottom, and again on March 9th of this year, it hit a new bottom. From March 10th until the present, the stock market has moved upwards. It is not unusual to see the stock market have a rally within a bear market. The rallies generally last from two to three months. If the current situation is a rally, it will be three months old this Wednesday. We have had periods within bull markets when the rallies have lasted for five months. I don’t believe that will be the case with this rally. Bear markets tend to retrace their steps back to a bottom to test it before a bull market begins. Bull markets are generally found when prices are rising on increasing volume and where the vast majority of stocks are showing new highs in their prices compared to the previous 52 weeks. In addition, the up-volume of stocks is far greater than the down- volume. From March 10th until the early part of April, we saw some of these characteristics in the stock market. Volume had picked up, some stocks were seeing new 52-week highs and the up-volume was stronger than the down-volume. This period ended with a new period in which the market indices were trading within a band showing buying on the down side and selling on the up side (“buy the dips”). Bit by bit, the volume began to decrease. Last Monday, June 1st, General Motors filed for bankruptcy and the stock market made a major move up. While that move was impressive, it was on relatively low volume and seemed to be more of a lack of sellers than demand from buyers. This pattern continued last week. From technical analysis, what seems to be happening is that the rally is losing steam! If technical analysis is not enough, it is hard from fundamental analysis to figure out how the stock market can move forward with 6.7 million people on regular 26-week continuing unemployment claims, another 2.35 million claiming jobless benefits through an emergency program (up to an additional 33 weeks) for a total of over 9 million people out of work, and this does not count the people who have either given up looking for a job or who have settled on being “underemployed.” The economy is giving up more than 600,000 jobs a week! Will U.S. consumers, who are very important, as they represent over two-thirds of the economy, be able to spend or pay taxes if they are out of work? Business has reacted by retrenching and cutting costs as well as workers. In the fourth quarter of last year, the economy was down 6.3%, and for the first quarter of this year it sank 5.7%. Construction is down, capital spending is down and exports are down. Now the logic is that as bad as things are they are better than “before.” This may be the case, but generally stocks rise when the potential for earning is rising, and I find it hard to figure that in the next six months we are going to see a major turnaround in earnings. I could be wrong about looking at a bear market and thinking that, at best, it will be in mid- to late October before we see the real beginnings of a turnaround, but I don’t think so. Ed

Everything is Relative!

2009-05-18T14:01:00.000-07:00

It seems the current state of the economy, the stock market, the bond market, and our personal feelings are up from last fall. This is a good thing, because last fall it felt as though the world was coming to an economic end. This new feeling has led individuals and families to change many of their values. People have started to spend less and save more. As a matter of fact, people are saving much more than they have for years! Families play games together and share time together again. There seems to be a feeling of “pulling together” to make it through the current economy. Almost everyone knows someone or knows of someone who has lost his or her job. Perhaps our value system is undergoing a fundamental change. Perhaps it is no longer about the huge house, the most expensive car, the most things, but rather about fundamental life needs: a roof over your head, food on the table, clothing on your back, decent medical insurance, and family. The lack of medical insurance is the problem that is inflicting some of the greatest pain on people who are out of work. With all this having been said, we are not out of the woods. The number of new people losing their jobs weekly seems to be declining, but that still means more people are out of work. In early March the jobless claims ran at about 670 thousand and last week it was down to about 600 thousand. The uptrend in claims now extends back to the summer of 2007 and has not been broken. Putting it another way, “continuing” claims have reached 6.35 million, a record! We are now reading about the bankruptcies of Chrysler and likely General Motors. They are not alone, as we see many local businesses go bust along with regional and mid-sized firms. Commodity prices continue to move lower as worldwide demand is down significantly. The lowering in demand is more prevalent abroad than even in the US. While credit markets are better, they still have a way to go before we see the liquidity that is needed. On the housing front we see a glut of homes on the market, selling prices are moving down, and now mortgage rates are beginning to rise again. The above will be dealt with over time. The point is “over time”. I think that between March 10th and May 8th we witnessed an uptrend in what is still a bear market. I could be wrong, but I would not be surprised to see the stock market move down in the coming weeks. My greatest concern is that while the bankruptcy of General Motors is built into the stock, I don’t think it is built into the emotional side of the overall market. History tells us that markets tend to retreat back to their market lows to test those lows. We saw a dramatic low in the market on November 20th of last year. This was followed by a new low on March 9th of this year. Next I believe we may see the market retreat to Dow 7500 and, if it breaks through that low, to move sharply lower. I view this as if the economy has gone through an earthquake and now we are suffering all of the aftershocks. Often we are not expecting the earthquake but once it happens, we fear the aftershocks. It seems likely to me that we are going to see stocks move lower in the near term. The selling pressure has not changed much since November 20th’s decline. With many sellers and fewer buyers, the market should be declining. For now it would seem cash and quality bonds are the best places to have funds. Ed Mallon

April Showers

2009-04-23T10:58:00.000-07:00

Yesterday we had the first conference call for Secure Planning. We had quite a few individuals listening in as I discussed “Managing Investments in a Turbulent Economy”. Hopefully, those of you who listened now have a better idea of how Portfolio Insurance is created with the use of short-duration investments, with lower risk, coupled with longer-term investments with higher levels of risk. This can be very helpful in managing the downside of investing. In looking at interest rates, I’ve noted that overall rates have been decreasing during the month but in the past few days, rates have started to edge back up again. To me this is not a good sign. This is a patient with a temperature who seems to be doing okay. In addition, the stock market still seems to be marred by an overabundance of sellers, with buying occurring sporadically. It would seem with this combination that we are likely still in an overall upward pattern within a bear market. The good news is that most investments are up for the month to date. The bad news is that they could slip back down very easily. I would describe this as a jumpy stock market. In stocks and bonds, we have repeatedly seen this market react rather quickly to both good and bad news. This reaction can actually take place during a single day! At the end of March, the S&P 500 was standing at 797.87. As of yesterday’s close it was at 843.59. It is certainly good to see the market moving in a general upward direction. As I mentioned in my last newsletter, the S&P 500 opened the year at 902.29, so it still has a way to go to get back to where it was at the beginning of the year. The question of course is, will it? My personal concern is that we have not seen the last of the reaction to the current economic situation and will likely see a retrenchment back toward or below the lows of March 9th at some point in the future. The answer for now is to enjoy present sunshine and be prepared for those April showers that will bring us a bull market. Ed

Anticipating Earnings Reports

2009-04-13T13:35:00.000-07:00

The initial earnings reports for the first quarter were nothing to write home about and did not impact the stock market. A positive report from Wells Fargo last week, indicating much higher earnings than expected, moved the stock market up. It is possible that reported earnings for the quarter might not be as bad as expected. Bad news and good news appear to set the stock market off very quickly. Today the market started in a down position, seemingly because of weekend news indicating the government’s willingness to let GM go into bankruptcy. While volume remained light for the day the S&P 500 finished in an up position. Thus far we have had five weeks of the market being up. Since earnings expectations are very low, it is possible that the actual earnings figures will come in somewhat better and continue this market rally. We continue to see a disproportionate number of sellers to buyers, which leaves me believing that we are in a correction within a Bear Market and not at the beginning of a new Bull Market. No matter what is causing this upturn in stock prices and lowing of interest rates I am happy to see it and would be even happier if it continues! Ed

Percentages Can Be Deceiving

2009-03-26T11:27:00.000-07:00

It's been awhile since the sentiment in the market has appeared positive. With the S&P 500 having come off of a low on March 9th, we have seen a marked improvement in the value of stocks. Remember, however, that this percentage increase is coming from a very low point and that percentages can be deceiving. For example: if I had $100 and it decreased in value to $80, that would be a drop in value of 20%. If that $80 rose in value by 20%, I would now have $96 and still not be back where I started. If you think of the stock market as having dropped about 50% at its low, that means that $100 of investments would now be worth $50. If it were to rise by 20% (sounds like a lot) that would be $10 and we would now have $60. Better than before, but still not good! Percentages can be very misleading. I’d rather see it in dollars so I can understand what is really happening. In six of the seven trading days following the March 9th low, the market was up. In three of the five subsequent days, the market was down. Yesterday, March 25th, the morning saw the DJIA up 200 points. By late afternoon, the DJIA was down 110 points. That is a negative swing of 310 points in a matter of hours. At the close, we had a rally of 178 points with the DJIA showing a nice gain of about 1% for the day. We are likely in what is referred to as a trader’s market. The traders who are buying are not purchasing for long-term investment, but rather to either sell what they don't have (short selling) and buy back in when prices drop, or to purchase when prices are low and sell at the first opportunity to make a profit. In this environment, the supply of stocks available for sale is high while demand is variable. When demand is strong, stocks do well as sellers find willing buyers. When buyers step aside, even for a brief period, the market slides down rather quickly. At this point, the notion that a new bull market has begun is hard to justify. It looks more like an uptrend in a continuing bear market. Confirming this idea is the fact that interest rates, that had decreased earlier in the year accompanying a rise in stock prices, then rose again when stock prices fell, are staying at higher levels than I believe would be consistent with a bull market trend. I am happy with the gains but watchful of where it will lead us. Ed Mallon

How's Your Market?

2009-03-09T06:42:00.000-07:00

I was thinking today, as the market was falling, how am I doing? I realized that my values, my faith, and my belief that the U.S. is still the best place to live have not changed. What appears to have changed is our collective relationship to money. For a long time, "getting and spending" money was relatively easy. The "Big Easy" seems to be over. The new reality is that, as a country and a world, we may have to work hard simply to keep what we have. This is worthwhile, and will likely strengthen our values, just as WWII and the Great Depression did for past generations. This is not the kind of reality check we like, but here it is. We must be strong, stop whining, and keep our spirits up. If you’re looking for the media to do this for you, give it up. Watch an old comedy instead. It will be more meaningful. Ed Mallon

Positive Negativity

2009-02-24T08:55:00.000-08:00

Good news: Everyone thinks the economy is only going to keep getting worse! It seems that when "everyone" knows something bad is going to happen the worst is often behind us. I was thinking yesterday, as some of the stock market indexes reached new lows in this bear market, about the price of oil just a few months ago. The price had reached about $140 per barrel and the talk was that it was bound to rise to $200 or $250. Very, very few "knowledgeable" people thought it would go down. Where is the price of oil now! Would you believe it has fallen about $100 per barrel to roughly $40. Bear markets generally begin to wane when "everyone" is sure there is no hope! In listening to what has been going on lately it would seem we may be close to that point. Yesterday, when the S&P 500 and the NYSE indexes reached new lows for this market downturn, I found that not many stocks were reaching new lows. This too may indicate that the market is getting to an oversold place and is only waiting for the time when the signal to buy emerges. I have read reports by some that the Dow will drop to 5500. This is possible. I have not been reading much from people who are saying the market could go to 10,000. I think that this, too, can happen. This may not be the bottom, but the sentiment is so bad, and so much negativity has already been built into the price of stocks that we may well be approaching the bottom. After a year and a half of being pessimistic about what is going on, I now feel optimistic! I don't think the ship is going to sink! Ed

Volatility and Interest Rates

2009-02-06T11:54:00.000-08:00

For some time I have indicated my concern that, unless interest rates came down, this economy and the stock market would have a difficult time moving forward without excess volatility. Since the latter part of January, we have seen interest rates on both core and high-yield bonds rising again. The move has not been as significant as it was last year, but the trend is not what I'd like to see. During this same period, we have seen the stock market trending downward. In the last couple of days we have seen high-yield rates on bonds dropping a bit and the stock market moving upwards. What is most interesting is that this has come at a point when unemployment has been reported at 7.6% and the number of the newly-unemployed is the highest since 1974! What we don't know is whether government actions will have an impact on interest rates and business in the short run or whether it will take several years. Once again, we must remain patient and maintain the belief that things will get better eventually. As businesses become leaner through layoffs, it is concerning that more and more people become unemployed. We need to see efforts directed at creating new jobs and getting people back to work! Ed

It Makes Me Wonder!

2009-01-16T10:01:00.000-08:00

It makes me wonder, is it a coincidence that Obama made his acceptance speech at the Democratic National Convention on the 40th anniversary of Martin Luther King's famous "I have a dream" speech? It makes me wonder, is it a coincidence that Obama will be sworn into office as President of the United States the day after the Martin Luther King Day celebration? It makes me wonder, can hope replace fear? I sure hope so! Ed

Happy New Year!

2009-01-06T10:25:00.000-08:00

This is the New Year we talked about during the old year! The old year was unkind to almost all asset classes. It did start to redeem itself late in the year with interest rates declining and stocks rising a bit. The nicest thing that I noticed was that after my blog on December 19th, both the core and high-yield bond values continued to increase as interest rates continued to drop. At this writing we have seen the core interest rate go from 7.22% on December 19th to 6.33% on January 6th. That is good for bond values. In addition, the interest rate on high yield bonds has gone from 21.65% down to 16.21%. What this seems to be telling us is that the fear in the credit markets is beginning to subside and investors are becoming more rational about prices. In a similar fashion, we are seeing a fairly stable trading range in most of the stock market indices since December 16th with no real significant changes. This appears due, in large measure, to the lack of sellers (supply) rather than strong buying (demand). As long as the sellers are unwilling to sell at current prices, this is fine! This will not, however, move the market up very much. The key to bringing this market up is greater demand for stocks.

Interest Rates are Coming Down!

2008-12-19T07:27:00.000-08:00

For some time I have indicated that I did not believe a strong market upturn could happen until corporate bond interest rates came down from their high. When interest rates go down the value of bonds rises! I wanted to see the value of our bonds rise! Back in November of 2007, the corporate interest rate on core bonds was about 4.75%. In March, rates had risen to about 6%, which I thought was a good buy. From March until mid-June, interest rates declined to about 5.5%, but then we heard about Freddie Mac and Fannie Mae and their problems. In a matter of days, the interest rates shot up to almost 9.5% on core corporate bonds as many investors left corporate bonds and turned to the safety of short-term U.S. government bonds. Fear was running the markets! It has been my belief that we needed to see the core corporate interest rates decrease to below 7% before we would see relief from the fear that has driven this market all year long. Interest rates last month did finally get down to a range of 7.5% to 7.65% and stalled at that point . . . until this week! I mentioned to some clients that we might see the core corporate interest rates, when they did decrease, look something like the drop in the price of oil, with a rapid drop in rates and a corresponding increase in the value of bonds. Well, it happened! On Monday the interest rates on these bonds dropped to 7.35%. On Tuesday the rate dropped to 7.22%, still higher than my target of under 7% but looking better than we have seen in a long time. On Wednesday they went to 6.91% and I wondered: is this for real? Thursday confirmed the trend with the rate dropping to 6.71%. This is a major change in a very short period of time. Until yesterday there had been no real drop in the interest rates on high yield bonds that had risen from about 11% in March to 23%. Yesterday we saw the first meaningful drop as the rates went down to about 21.65%. The drop in interest rates seems to be the first signal since last June that the fear that has swept the market seems to be receding. I believe this is a good trend and I am optimistic about where we might go from here. Ed Mallon

Holiday, Followed by Turkey

2008-12-02T07:57:00.000-08:00

Last week seemed to be an optimistic prelude to the Thanksgiving holiday. The stock market managed four successful up days followed by a fifth on the Friday following Thanksgiving. Unfortunately, on Monday, the market was a “turkey” and gave back about half of what it had gained during those five up days. Some of this is profit-taking after such a run up, but part of it is that the economic news is still not very good. It has been my belief, and still is, that in order for the economy to move forward, we need to see the interest rates on corporate bonds decrease to a level that makes some sense. This has not happened. Interest rates rose in October and were followed by additional increases in November. If it takes lower interest rates to move the economy, then the stock market cannot do much until lower interest rates occur. Corporate bonds, in some cases, are linked to commercial real estate, and as the economy worsens, the question becomes “what is the value of the real estate that supports the bonds”? There seem to be many questions at present but few answers. The old administration in Washington is wrapping up their loose ends and likely will do little between now and the time that the new administration enters. I had a list of what I would do if I were the President-Elect and I must say that Obama is doing all of the things on my list. He will need to hit the ground running, and to this end he appears to have assembled a competent group to help him launch meaningful economic reform. I wish him well! Ed Mallon

False Breakout?

2008-11-06T13:58:00.001-08:00

The rally we saw on Tuesday, which appeared to be a breakout moving the markets higher, seems now to have been a false breakout. Yesterday's total market downturn, another 90% down day on the NYSE, was followed by an additional downturn today. From a technical standpoint, the downturn on Wednesday could be seen as a pullback, but today's results seem to indicate that the market may be reversing direction and going back to test the lows of October 10th and 27th. The support level for the S&P 500, for instance, had been considered to be at approximately 930. As of this writing the S&P has broken through that level and is at about 904 (down over 48 points for the interday). In a similar fashion, the support for the DJIA had been considered to be at about 8900 and as of this writing it is at 8696. Historically, the market tends to backtrack and test its lows before rising on a consistent basis. This movement of a rally period followed by a pullback period can take several months after it appears a bottom has been formed in the stock market. I would not be surprised to see the DJIA go back and test, or break the low of 7882 set during the day on October 10th. We will see. For now it would not appear a rush into stocks is a good idea.

Is This the Turn?

2008-10-14T10:15:00.000-07:00

Monday, October 13th saw a gain of 936 points, the greatest one-day point gain in the history of the DJIA. It was also the 5th largest percentage gain for the DJIA at 11.08%. The other four historic double-digit gains were back in 1929-1933. As a matter of fact, the next largest gain was on October 21, 1932 and was followed by a decline that took the DJIA down to 33 points and a bottom in February 1933. The point is that double-digit gains have been characteristic of bear markets. You need to have patience in this market. My personal belief is that the bond markets need to see interest move downward before a real economic change is possible.

Give Stocks Credit!

2008-10-08T07:23:00.000-07:00

With a loss of more than 500 points on the Dow yesterday the Dow has now lost 875 points in two days. I don't think as a percentage drop this is a record but it is significant! As the stock market heads down my greater concern is with the bond market. In October of 2007 an investment portfolio of investment grade corporate bonds, with an average maturity of about 4.5 years, was offering a yield of approximately 4.75%. In March of 2008 the yield was about 6%. That same yield is now over 8%. As the interest rate goes up the value of the bonds goes down! To make matters worse, the average yield on high yield bonds during the same periods went from approximately 7.25%, to 11.85% and is now over 18%! These are very significant changes. To put all of this into perspective: currently the return on U.S. Government debt is paying interest of 1.68% on the three year, 2.46% on the five year and 3.5% on the ten year debt. What this means is that most of the money leaving the stock market, commodities, etc. is going into U.S. Government instruments. Yesterday the Federal Reserve indicated that they will begin major investments into commercial paper, which is short term lending covering a period from overnight to less than a week. This is an area that is very important to business borrowing. It is hoped that with this move credit markets will free up and money will move into other credit markets such as corporate bonds. If this happens we are likely to see interest rates on investment grade and high yield bonds begin to fall. Ultimately, when the credit market starts to free up the environment for business will get better. Over time this should lead to stock prices stabilizing and bring confidence back to the market. This will not happen overnight but will take time. We must learn patience!

Failed Bailout Vote!

2008-09-29T13:16:00.001-07:00

Failed Bailout Vote! It was never certain that the vote on the bailout would pass. With five weeks to go until election day, and with a large segment of the population mad at the idea of bailing out big business, it was a tough call for the House members. What would have happened if the bill had passed? We don't know. My guess is that, with passage, the value of mortgage loans would rise because the Federal Government would be a ready buyer. As the purchases occurred, cash would flow back into the banking system. If the bailout did not pass, I would expect to see the value of the mortgage loans drop even farther, the stock market retreat because of the unknown, and greater amounts of money flying to US Treasury bills and notes, reducing the interest paid on these instruments to an insignificant amount. For the vast majority of our clients, we have a very heavy position in cash. On September 19, 2008 the Federal Reserve guaranteed these accounts for the full amount in the accounts, both taxable and tax exempt. As I indicated in a recent newsletter, the bonds in our accounts seem good, are paying interest and are paying back the principal when the bonds mature. I believe we have taken a defensive posture that we should maintain even while it appears there are buying opportunities in this market. I am not sanguine about what is happening. I believe that what we have witnessed in the past several weeks is a lack of leadership in Congress and the business community. Usually at times like this the Executive Branch provides the needed leadership, but this administration has lost its credibility for many and must rely on others to move the process along.

That Nasty Four-Letter Word!

2008-09-23T09:09:00.000-07:00

It's a nasty four-letter word that none of us likes to use. Matter of fact, most of us never want to think about it. But it is a word that is always there, hovering in the background, pouncing when least expected. We are tormented with its unspoken presence in the media, our daily discussions with friends and family and in the workplace. The word of course is "FEAR". The idea of fear keeps us in place, like a deer caught in the headlights of a car, unable to move. What should we do? Where should we go? Will we be okay? This past year has been a period of increasing fear for many of us. First we read about subprime mortgages and how people were losing their homes. Then we saw the price of a barrel of oil go up to more than $145. Then we had the crisis with Fanny Mae and Freddie Mac seeming to bring ordinary people's mortgages to the brink and hurting home values. If this was not enough, we heard about three major investment banks going bust, with one being sold by the Federal Reserve for pennies on the dollar, another merging with a major bank and the third going bankrupt. Along with the investment banks we discovered the largest insurance company in the US was being taken over by the government! Fear! To say that this is unprecedented is not idle chatter. It has been compared to the period of the: "Great Depression" and the period just after WWII. Its root cause: greed! Not just plain old greed but a very high level of greed practiced by top executives of very large companies. It makes me MAD that we taxpayers are going to bail out companies who had the audacity to give their executives bonuses of $80 Million or more for their "stellar performance". I have no doubt that Congress, in which both political parties allowed this to go on, will do what they need to do to bring liquidity and an attempt at stability and oversight to the business community. Eventually we will all go back to our "normal lives" and this crisis will pass and be forgotten. The problem is that the solution seems to say to those large companies that took big risks and some of those individuals who took big risks, “we will not let you suffer the consequences.” For the majority of us who have been paying our taxes, doing things "the right way" we now have the privilege to aid those who pursued their greed. I'd like to see the US Government go back to the Chief Executives of Citi Bank, Merrill Lynch, AIG and others and collect back those big outlandish bonuses and terminate those lucrative pensions and give the money back to the taxpayers! Some have FEAR on this occasion. I am just MAD! I do not think we are a greedy society but a society that has some very greedy people who are in a position to hurt our society!

2008-09-05T13:43:00.000-07:00

Today the U.S. Government announced that the jobless rate now exceeds 6.1%. This was an unexpected jump, with most analysts believing we would not see 6% until the end of the year. What might this mean? With this jump in unemployment, the Federal Reserve, which has been worried about the economy all summer, will likely leave rates unchanged after their meeting on September 16th. Also we will likely see consumer-spending decrease substantially in the third quarter, after the rise in spending from the incentive tax rebate of the second quarter. All in all, the economy appears to be slowing down and will likely show little growth, or perhaps a downturn, for the balance of the year. Additionally, the sub-prime loan problems have driven interest rates on bonds to recent new highs. Refinancing of the majority of sub-prime mortgage loans should be complete by February and we may see the housing market begin to pick up again this spring. In my opinion, the inflationary effects of the oil price increases will also take until February or March to totally work their way through the economy. When this occurs, we are likely to see prices stabilize. Perhaps the most important issue is that by November, we should know who has been elected President. The stock market likes to know who will be serving in the White House, and this uncertainty is likely to continue to make the market volatile through Election Day.

Can it rain and be sunny at the same time?

2008-08-07T06:27:00.000-07:00

On Monday of this week, the inflation rate for the month of July was reported to be 0.8% or an annualized rate of 9.6%. This compares with an annualized rate in June of 7.2%. This would appear to be bad news because it means the price of goods and services are going up at a much higher rate than the Federal Reserve Board (Fed) would like to see (1.5% to 2.5%). In such a situation, you would expect to see the Fed increase their key interest rate. On Tuesday, the Fed met and left the key interest rate unchanged at 2%. This also means that the prime leading rate stays at 5%. The stock markets took this as good news, with a healthy advance in prices. The bond market took it as bad news with interest rates rising (and therefore the price of bonds declining). It would seem that, with the price of oil falling for the past week and the economy not looking its best, the Fed decided to gamble that prices will stabilize as oil prices are reduced. The lower oil prices could benefit food and transportation costs. This in turn could mean that inflation will be reduced. What we are seeing, in any event, is that the current Fed is more concerned with the economy than with inflation. Ed Mallon

Fearful Headlines

2008-07-17T06:54:00.000-07:00

I have been noticing that the headlines used by the media during the past month seem to evoke fear. An example of some of today's headlines: "Oil Prices Plunge More Than $10 a Barrel!" "Fed Chief Details Woes in Markets, Housing, Jobs" "Bush: Troubled Financial System is Basically Sound" "Wholesale Prices Soar in June; Sales are Sluggish" Fear is what many Americans are feeling right now. They wonder if the financial system will be okay and more important, if they will be okay. We are driven by our emotions and the emotions of others around us. The more negative the news, the more negative and fearful we become. We are "news junkies" who need a constant infusion of the "latest news." The problem with all of this is that it does not give us perspective or context of the events happening around us. Most media personalities have little understanding of how the events fit into a broader pattern of economic and social forces. For example: What does oil plunging by $10 a barrel really mean? It likely means that some of the speculation in oil is giving way to more realistic pricing. If this trend continues inflation will be lowered and the value of the dollar strengthened. When the Fed chief details the "woes," do people realize that what he is saying is that the growth we are having is likely to be less than anticipated and that he still expects the economy to grow during 2008? When President Bush talks about the financial system, he is really saying that the government believes that the actions that are being taken by the Fed and Treasury will alleviate the current problems. Saying wholesale prices "soar" is simply saying that the "real inflation rate" which includes fuel and food, is rising at an annualized rate of 13.2 (1.1% in June multiplied by 12 months) as opposed to the "core inflation rate," which does not include the volatile fuel and food sectors, which is rising by an annualized rate of 2.4% (0.2% in June). Real people eat food and use energy! Until June when the Fed finally started to mention the real inflation rate, they had been consistently looking at the core rate of inflation and indicating that inflation was not a big problem. They now "get it" and will do what they need to do to contain real inflation. The inflation rate has meant a higher amount of income is going to essential expenses (food, fuel), leaving much less for other spending. I still believe we are going though a recession that is similar to the one we had in 1990, along with a bear market in stocks. The confluence of a bear market in stocks, a bear market in housing, and rising oil and food prices is unsettling. In the bigger picture, these events are setting the stage for the next new direction of the market. I am already seeing articles about new developments in "Green Technology." Keep oil up in price and, in the long term, the US will respond to become more self-reliant, stronger financially and better disciplined.

FED changes

2008-06-26T09:03:00.000-07:00

Yesterday, June 25th the Federal Reserve Board (FED) made a change. The change was that there was no change. They kept a key Federal Funds lending rate (the interest rate) at 2.00%! This was an expected decision by the investment markets around the world. It did confirm however that the FED is concerned with “REAL” inflation and is not talking about the “Core Inflation Rate” as they did at prior sessions. Since the Clinton administration decided to mess around with how the inflation rate is calculated (as well as the calculation of unemployment) reality has taken a holiday! When you hear about the inflation rate you are usually hearing about the “Core Inflation Rate.” What is the “Core Inflation Rate?” Let me put it this way: someone asks me what I had for dinner last night and I tell them “A plate, a knife, fork, spoon and napkin.” No food? Food doesn’t count in the “Core Inflation Rate”. How did you get to work today? By car. How did the car move you from home to work? On wheels. Energy doesn’t count in the “Core Inflation Rate.” How are cost of living adjustments that are made by the US Government on things such as Social Security determined? Of course, using the “Core Inflation Rate.” Food and energy costs have gone up substantially in the past six months. In addition, the increased cost of food and energy are rippling through other products we buy and services we use, such as plastic products and restaurant price increases. The FED is in a dilemma! On one hand the economy appears to be in a recession while on the other hand inflation is a problem. To curb inflation you raise the interest rate. To help the economy you lower the interest rate. The current answer by the FED was to do nothing! In March of this year we moved some investment money into investment grade bonds and into high yield bonds. At the time we had seen the investment grade bond interest rates go from about 4.75% in October to 6% at the beginning of March. A bigger change had occurred with the high yield interest rates going from about 7.25% to 12%. Since that time the investment grade rates and high yield rates had been going down to 5.8% and 10.5% respectively. I told some of you that I was very cautious about how much money we should place into these investments because I was worried about inflation. I am very glad I was cautious. As of today the investment grade interest rate is over 6.20% and the high yield rate is now up over 11.40%. High interest rates are not good for business and therefore not good for stocks. Based on the above I believe that stocks will go down more and longer term interest rates will continue upward until the FED begins to raise their Federal Fund interest rate and show that they are serious about fighting inflation. At some point, when the interest rates get high enough, longer term interest rates will be a real buy!

What a Week

2008-06-09T06:08:00.000-07:00

What a Week! This past week saw the Dow go down 3.39%, the S&P down 2.83%. This was in part a response to economic events that were reported during and at the end of the week. On Tuesday, Standard & Poor’s/Case –Schiller’s national home price index fell 14.1% in the first quarter. On Friday, the government announced that the unemployment rate rose by an unexpected 0.5% to 5.5%. Oil futures hit $138.54 per barrel on Friday, and an investment banking firm on Wall Street said they thought it could hit $150 by summer. A consensus was building that the US economy is either in or going into a recession. The outlook for Europe is not good either. Wow! What does all of this mean? Having money in cash or cash equivalents certainly seems to make sense. Having money in investment-grade and high-yield corporate and municipal bonds paying interest seems to make sense. With the dollar on the decline, even international investments make some sense. For example: even with the worst earthquake in 32 years China’s passenger-car sales grew 16% last month. Global growth seems to be unabated. How about commodities? Commodities tend to move in the opposite direction of the dollar. This would include oil, gold, silver, etc. The commodity markets indicate that there is widespread speculation occurring presently. The head of the Federal Reserve, Ben Bernanke, is talking about a strengthening dollar. This could mean the federal government is about to get serious about reversing the dollar’s direction. Such a move would likely not be good for commodities. Could the bubble burst and the price of oil tumble? Some say world demand is such that, when coupled with flat output, this could not happen. I don’t believe it! I lived through the period when the Hunt Brothers tried to corner the market on silver. From $1.95/oz. in 1973, silver skyrocketed to $54/oz. Ordinary people were buying silver with the expectation that it would just keep rising. Bang! Down went silver prices. From 1980 through 1987, silver prices dropped to about $10/oz. Today silver is priced at about $17/oz. (More recently, Americans were sure that real estate would just keep on rising! Ugh!) Is the same now true with oil? Ed’s pendulum theory says: “Every investment market swings from being underpriced, relative to the norm, to being overpriced!” In this process it is possible for an investment market to establish a new “norm” but it will be within the range of over- and under-pricing. This is not to say that an individual investment within that market will outperform or underperform. But, the overall market, such as the market for oil, must go through this process. With commodities like oil, it is often thought that there is a finite amount of something and therefore its price can go up with no end in sight. In fact, it appears that when a particular commodity becomes overpriced, a new substitute will either be found or it will become cost-efficient to utilize a competing commodity. The question in my head now is: “Are we ready to become Green as a society and invent new ways of living?” Ed Mallon

Prices Soar!

2008-04-17T06:43:00.000-07:00

The federal government in releases yesterday and today gave initial indications of how the economy did in March. The picture was subdued as the government concentrated on the “good news” that “core” inflation was only growing at a 0.2% rate for the month or an annual rate of 2.4%. This is considered to be within the government’s targeted rate for “core” inflation. The “core” rate does not include food increases or the rise in fuel costs. For March, energy prices were up 2.9%, the biggest increase since November. Even this percentage seems out of line since they also report that heating oil was up 13.1% and diesel fuel, used by truckers to get your goods to the local store, was up 15.3%. Food prices for the month were up 1.2% (this would be 14.4% annualized), reflecting the increases in cost for vegetables, rice and beef. Anyone going to the grocery store or buying gas for their car is seeing the jump in prices on almost a daily basis. The question that must be asked is: will this lead to a jump in longer term inflation or is it simply a factor of the cost of oil as it passes thru the various parts of our economy? We also must remember that as the value of the dollar has been going down, against other world currencies, the cost of oil is bound to go up in dollar terms. The Federal Reserve Board (Fed) which has been lowering the Fed discount rate to stimulate the economy must now consider how big a problem inflation is and where it might be going in the future. The lower discount rate also has a negative impact on the value of the dollar in world markets. The former head of the Fed believed that fighting inflation was job one for the Fed. Thus far it appears the new chairman has been more concerned with the economy than inflation. At the last meeting we saw the first decent in many years with some Fed members beginning to question the sharp reduction in interest rates as inflation seems to be accelerating. Raising the Fed discount rate tends to slow or moderate the inflation rate. Will the rate be lowered (help the economy), left the same (no clear decision) or raised (moderate inflation and perhaps help the dollar)?

2008 How’s it going so far?

2008-04-11T13:20:00.000-07:00

As I am writing this, on Friday April 11, 2008, the market has just made another one of its downturns. After having gone through a succession of downturns from the beginning of the year until the middle of March it seemed to have taken an upward beat and perhaps it is now ready to start downward again. Since I believe we are in a Bear Market this would be a classic Bear Market event. Times of upward movement in the market tend to give hope followed by declines. The Lowry Service, which is an organization we use for technical information, has been indicating that even when the market has moved up it has done so on less supply (fewer stocks being offered and less volume) rather than real strength in the market. The Boston Globe, in the April 6, 2008, business section noted that the average diversified US equity fund lost 11% in the first quarter, according to Morningstar Inc., while Asian stock funds, excluding Japan, fell 20% and technology funds fell 16%. The Dow Jones Industrial average, of 30 stocks, by comparison was down only 8%. As noted above it seems most of the losses for the quarter occurred before the middle of March when the market moved up a bit. With money market funds and CD’s getting less and less interest it seems a shift into investment grade bonds is inevitable. For our clients where we have taken a defensive position we are moving more of the funds into intermediate investment grade bonds with just a splash of high yield bonds to give us a higher overall yield. In these cases we are keeping the exposure to equities rather limited for the foreseeable future.

Market Stimulus 3/19/08

2008-03-20T06:14:00.000-07:00

This has been an eventful week with the Federal Reserve having done a lot to increase liquidity in the markets, by both lowering the Federal Funds rate and the Discount rate, while also feeding more funds into the economy thru banks in investment firms. The impetus for this seems to have been the fear that Bear Stearns would go under and that other investment banking firms might follow. With the help of the Federal Reserve's finances J.P. Morgan bought the venerable old firm, cheap! The initial reaction to all of this activity was to see the stock market hold its own on Monday and go roaring up on Tuesday! This was followed today, Wednesday, with another downturn in the stock market. All and all it would seem that there are still more sellers than buyers in the market. We have not reached the bargain basement yet! The Federal Reserve seems to have restored the sense of adequate liquidity to the fixed markets and municipal bond markets in particular, that went through a very difficult period from the middle of February up until about a week ago. In my opinion, the changes that the Federal Reserve has made will take time to go through the economy before they have the desired effect. Generally such changes take anywhere from three to six months after implementation before they make the desired positive change. The changes made by the Federal Reserve at the end of January have not fully been realized! My thinking remains that the economy is in a recession, that there are currently some opportunities in fixed securities (bonds) and that stocks will either be lack luster or down until mid year. I also believe that the much-maligned U.S. Dollar is going to see a rebound during this period, which makes me hesitant to venture too much investment money into international stocks or bonds. The one overriding concern that I have is inflation. With the monetary policy of the Federal Reserve focused on the economy and making money readily available it may lead to higher levels of inflation. Time will tell.

A Changing Picture 2/20/08

2008-02-21T07:45:00.000-08:00

Today the minutes from the January 29th Federal Reserve meeting were made available. It showed that the Fed is worried that the economy is going to slow more than originally forecast, joblessness will be higher (5.2%-5.3%) and inflation could be a problem. Yesterday we saw oil hit more than $100 per barrel, the inflation rate for January go to 0.4% (or 4.8% anualized) and housing permits to build drop to the lowest level since 1991. All of this seems to indicate that we could have inflation and at the same time have a slowing of the economy. That being the case, it is possible that we will see longer term interest rates on bonds go up while equities do not do very well. This may present a buying opportunity for bonds. Ed

The Trend Continues

2008-02-05T07:45:00.000-08:00

The S&P 500 dropped more than 3% today. With the information on the loss of jobs, for the first time in four years, released last week and the release today of the dramatic drop in the service sector, to a low not seen in seven years, indications are clear that we are nearing recession conditions. To be a recession the economy must undergo two quarters of decline. Adding to this contention is the fact that the Federal Reserve saw fit to drop the discount rate a total of 1.25% in a little over a week at the tail end of January while the President and Congress were working on pushing through a "stimulus package" in hopes of staving off a recession. It seems at this point supply outweighs demand creating deep downward moves in stock prices. On the other hand liquid assets such as money market funds, municipal bonds, U.S. Gov't fixed investments and high quality corporate bonds are doing OK. More about all of this is contained in my new Newsletter for February. Ed

In Tune with the Stock Market - January 2007

2008-01-25T13:41:00.000-08:00

It has been said that "the trend is your friend!" If that is the case, with stocks having been going down since the high in October, the trend is not a friend to stocks! It has been our position for this past year that a defensive strategy for individuals who are near retirement or are retired makes a great deal of sense. This has been a good time to be in liquid fixed investments, especially municipal bonds. We have seen a flight to high quality and more liquidity as the market has continued down. Times change and the market will change too. We are waiting to see what the Federal Reserve does on January 29th and 30th.

Testing Entry

2007-10-11T07:01:00.000-07:00

Hello all, We are currently testing my new blog to see if it works properly.