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ADV Part 2

 

 

 

Investor Resources Inc, Investment Advisory Service, Port Orchard, WA

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2010Sep19 Week In Review

Week in Review: September 19, 2010

Economy:
 
Expectations accompany all economic environments. Since the 1981 Economic Recover Tax Act, we have expected growth, so much so our expectation morphed into entitlement. That sense of entitlement has been replaced with government entitlements to sustain minimal levels of household income as national poverty levels have reached a 15 year high. Concurrently, the use of food stamps has risen to 31.5 million approaching the high of 10.5% in 1994. Job losses and home foreclosures are the primary catalysts for the increase.
 
An increase in crime, normally associated with hard economic times, has not been occurring. The latest stats show crime declining in all major categories. There are several possible causes. The first is another decline in adolescent population like that which materially helped Mayor Giuliani’s war on crime in 1994. As adolescents move into their 20s, marry and have children, personal responsibility increasingly redirects energies away from criminal pursuits. This demographic trend will continue for another decade.
 
Second, poor employment prospects have increased the number of residents per household possibly increasing a sense of personal security and accountability. Third, police department budget reductions have resulted in reduced enforcement possibly resulting in under reported statistics. Reducing police forces is a visible and “quick fix” for state budgets. A political backlash is often used to justify tax increases rather than reduction in less visible or less essential parts of government. Time will tell whether the demographic changes will be sufficient to sustain the current trend of lower crime rates.
 
Real Estate:
 
Residential foreclosures increased to a record high in August after auctions failed to provide acceptable bids. Banks are slowing the processing of default notices in an effort to support already weak prices. Except for starter homes, we believe their efforts will fail due to insufficient demographic demand for larger homes.
 
Low down payments and low credit scores were, in part, responsible for the 2008 financial crisis. Prudence would suggest that lenders require reasonable down payments and credit qualification for residential mortgages in an era of falling prices. That would be normal markets at work, but the federal government has intervened, again. The Federal Housing Administration has reduced credit and equity requirements for first time home buyers with down payments as low as 3.5%!
 
The issue has changed, but Peter, Paul and Mary asked a still relevant question in Where Have All the Flowers Gone? “Oh, when will theyever learn? Oh, when will theyever learn?”
 
Stock Market:
 
Markets continue to trade in a sideways channel dominated by very few, primarily large and very liquid securities. Half of the daily volume is concentrated in 112 stocks with 90% of daily trading in 1,029! Volatility and lack of forward progress in rebuilding portfolios has contributed to investor fear regarding equities.
 
Investors have continued their flight to fixed income. In the search for an attractive interest yield, almost all bond categories trade at a premium. The problem of low yields has been especially damaging for pension plans dependent on interest payments to support retirees. Overly optimistic return assumptions at the turn of the century combined with unusually low interest rates has resulted in massive pension shortfalls.
 
State and municipal governments are being squeezed between legal pension payment obligations and a lack of revenue to continue funding requirements. The new class war fare will be tax payers versus pension recipients. A lower birth rate in the 70’s means fewer working tax payers today aggravating the weakened tax revenues from recession. The politically easy answer, of course, is to transfer the unfunded liability to the federal government – the U.S. taxpayer.
 
For the third consecutive month, analysts have been scaling back earnings forecasts in line with increasing doubts about economic recovery. Net export activity may give a slight boost to GDP over the next year but will be insufficient to replace the jobs lost since the end of 2007.
 
Concerned for further economic slowing and the risk of deflation, the Fed has affirmed its commitment to monetary accommodation. The Administration desires additional legislative stimulus. However, Alan Greenspan, former head of the Federal Reserve, has reversed course by suggesting that fiscal stimulus has not worked as expected and the federal government should quit its intervention in the markets. Perhaps he remembered our quote from J.M. Keynes.
 
“When the facts change, I change my mind. What do you do, sir?” - John Maynard Keynes
 
Our plan is “the plan will change.” What is your plan?
 
If you would like a free relative strength analysis of your portfolio’s sectors and positions, call us at 800-317-9119 begin_of_the_skype_highlighting 800-317-9119 end_of_the_skype_highlighting.