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July 2010 Monthly Economic Update
Dow Jones: @11,000 or @ 7,000?
July 2010 Monthly Economic Update
July 2010 in Brief
The month in briefMay 2010 Monthly Economic Update
May 2010 Monthly Economic Update
The month in brief. Stocks corrected, investors sighed, and Wall Street couldn’t wait for May to end. In performance terms, it was the Dow’s poorest May since 1940 and the S&P 500’s weakest May since 1962.(source) European debts hung like a dark cloud over the markets – and took attention away from earnings and some positive indicators at home. Domestic economic health. Consumer incomes outpaced consumer spending in April: while personal spending was flat, personal wages were up 0.4% and disposable incomes up 0.5%, and the savings rate increased half a point to 3.6%.(source) We also had a bit of deflation: the Consumer Price Index and the Producer Price Index each declined 0.1%. (Core CPI was flat for April.)(source) The unemployment rate kicked up to 9.9% for April, even as the economy added 290,000 more jobs (more in the government sector than private sector!).(source)
The twin consumer sentiment barometers showed monthly gains: the University of Michigan/Reuters survey improved to 73.6, and the Conference Board’s index hit 63.3, a level unseen since September 2008.(source) More concretely, we had April improvements in industrial output (+0.8%), retail sales (+0.4%) and durable goods (+2.9%).(source)(source)
The Senate passed its take on the financial industry reform bill 59-39 on May 20, with the next stop reconciliation with the House version passed in late 2009. That may occur during June.(source)
Global economic health. The whole world watched Europe, fearing that even as the EU/IMF plan to ease the debt burden on Greece, Italy, Spain, and Ireland got underway, it wouldn’t be enough. The 27 European Union governments have amassed debt equal to 80% of the EU economy.(source) The flashing red debt light naturally led economists to ponder the chances of a double-dip recession. German chancellor Angele Merkel’s mid-May opinion that the bailout effort had “done no more than buy time” didn’t exactly boost confidence within global markets.
How about Asia? Well, new tensions between North Korea and South Korea built in late May, adding to global financial concerns. Away from that, Japan’s household spending retreated by 0.7% in April (better than the -2.5% economists expected) and its unemployment rate reached 5.1%.(source) Manufacturing indexes in China, Taiwan, South Korea and Australia all pointed to further expansion in May (though the pace of expansion was slower than in April).(source)
World financial markets. There were actually some monthly gains in May – the Philippines All Shares Index advanced 1.0%, and Chile’s IPSA rose 0.6%. That positive news aside, sizable May losses occurred on multiple continents. The DAX fell 2.8%, Canada’s TSX Composite 3.4%, the Sensex 3.5%, the South Korean Kospi 6.0%, the Hang Seng 6.4%, the Bovespa 6.6%, the FTSE 100 7.1%, the Singapore STI 7.5% … and all of those indices did better than the Dow. Others suffered double-digit drops: Australian All Ordinaries, -10.3%; Spain’s IBEX, -11.1%; Russia’s RTSI, -12.0%.(source) The MSCI World Index lost 9.91% in U.S. dollar terms; the MSCI Emerging Markets index fell 9.18% in those terms last month.(source)
Commodities markets. So how did gold do given all this turmoil? Very well. Those futures gained 8.88% in May. The other notable NYMEX/COMEX gains: coal, +7.72%; milk, +7.59%; pork bellies, +6.30%; orange juice, +5.62%; silver, +5.15%. The major monthly declines included oil (-11.89%), gasoline (-12.46%), copper (-12.62%) and at the bottom, sugar (-14.47%). The U.S. Dollar Index gained 6.00% in May.(source)
Housing & interest rates. The numbers were influenced by expiring tax breaks, an expiring school year and warmer weather, but they were still encouraging: existing home sales rose 7.6% for April month according to the National Association of Realtors, and the Commerce Department had new home sales up 14.8% that month (and 47.8% above year-ago levels).(source) Pending home sales, affected by the same phenomena, were 5.3% higher in March and reached a five-month peak.(source) Housing starts increased by 5.8% for April, but the Commerce Department had building permits down 11.5% - again, an effect of expiring federal credits.
With no murmurs of the Federal Reserve hiking interest rates in the near future, average rates on assorted home loans remained low. In fact, they went lower. According to Freddie Mac’s Weekly Primary Mortgage Market Survey on April 29, the average rate for a 30-year FRM was 5.06%; on May 27, it was 4.78%. The average rate for a 15-year FRM went from 4.39% to 4.21% during that interval. As for 5/1-year hybrid ARMs and 1-year ARMs, the average rates for those home loan types in the May 27 survey were 3.97% and 3.95%. Compare that to 4.00% and 4.25% in the April 29 survey. With Treasury yields going lower last month, some called this the American silver lining to the European debt crisis.(source)
Major indices. The numbers tell a rather painful story, hopefully not to be repeated in June. The CBOE VIX rose 45.40% in May, the biggest monthly percentage increase since October 2008.(source)
| % Change | 1-Month | Y-T-D | 1-Year |
| Dow Jones | -7.92% | -2.79% | +20.62% |
| NASDAQ | -8.29% | -0.53% | +28.84% |
| S&P 500 | -8.20% | -2.30% | +20.13% |
| 10-Yr TIPS | +2.33% | -10.81% | -20.96% |
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends.
June outlook. Will the austerity measures and bailout package in the European Union inspire confidence? Will investors stop selling out of fear and buy with renewed confidence? Will the correction reach a point of capitulation soon? (Has it already?) Can certain European countries alter their financial behavior as well as their balance sheets? These are the big questions. Could a rebound start with news of a drop in the jobless rate, and further encouragement from other domestic indicators? There is plenty of bullish sentiment left in the tank – and there could plenty of volatility to contend with this month and this summer if the situation in Europe isn’t stabilized. Let’s hope that the market has witnessed a bottom and can return to rally mode.
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April 2010 Monthly Economic Update
April 2010 Monthly Economic Update
If you don't know who you are, the stock market is an expensive place to find out.
What a Difference a Year Makes!
What A Difference a Year Makes!
First Quarter 2010 Economic Update
The quarter in brief. The opening quarter of 2010 can be summed up in four words: so far, so good. Despite murmurs warning us of a correction, a double dip recession, and a tepid recovery with sustained high unemployment, stocks appreciated nicely this quarter. It was a quarter in which major healthcare reforms became law, the dollar made a comeback, the housing market lagged and the global economy revved up its collective engines. Despite murmurs and warnings that the recovery was going to be weak and prolonged, it was a very positive time for investors.
Domestic economic health. Consumer spending, obviously the prime driver in a recovery, increased by 0.4% in January and 0.3% in February.(source) Consumer sentiment was up and down: in the Reuters poll, it went from 74.4 in January to 73.6 in both February and March, about where it was last September.(source)(source) The Conference Board survey read 52.5 for March, up from 46.4 a month earlier yet below January’s reading.
FED Stops Buying Mortgage-Linked Securities
FED STOPS BUYING MORTGAGE-LINKED SECURITIES
How will this impact the real estate market?
The Fed pulls out of the mortgage market. On March 31, 2010, the Federal Reserve halted its 15-month-long program to buy up toxic mortgage-linked securities.(source)Of all the things the Fed did to try and heal the economy and financial markets, this may have been its most crucial move. It was March 2009 when the program really began to get rolling. Guess when the current bull run began on Wall Street?
In purchasing about $1.25 trillion in mortgage debt, the Fed held interest rates on conventional home loans down, creating a golden opportunity for anyone who could refinance. Looking at Freddie Mac data, rates on 30-year FRMs were averaging 6.08% in November 2008 (when the Fed announced the program) and 4.97% in March 2010.(source)
The Fed has hinted it would be open to buying more mortgage debt if economic conditions demand – but with the economy healing by most measures, it feels no compulsion to extend the campaign any further.(source)
March 2010 Monthly Economic Update
March 2010 Monthly Economic Update
The month in brief. Stocks rocketed north in March. The DJIA, NASDAQ and S&P 500 all advanced between 5.2-7.2% for the month.(source) Whispers about a double-dip recession, a possible correction and prolonged malaise in the real estate sector were not loud enough to take the market out of rally mode. Shouts of victory and shouts of anger accompanied the passage of the President’s long-envisioned health care reforms. Economically, slow and reasonably assured growth seemed the order of the day.
Domestic economic health. First the indicators, then over to Congress. March’s ISM manufacturing index came in at a very strong 59.6, and the ISM service sector index read 55.4.(source) Durable goods orders rose by 0.6% in February, the tenth advance in the last 11 months.(source) Data showed personal spending up 0.3% for February, even as personal wages were flat.(source) It was hard to get a fix on consumer confidence. The Conference Board’s index soared from 46.5 in February to 52.5 in March, even as the IBD and University of Michigan indexes fell.(source)
Health Care Changes in America
HEALTH CARE CHANGES IN AMERICA
Might this be the end of the debate? Most Definitely Not.
The House approves the Senate bill. Not a single Republican voted for it, but 219 Democrats did – and by a vote of 219-212, the House of Representatives sent the Senate’s version of landmark healthcare legislation toward President Obama’s desk. The President signed the bill into law on March 23.(source)But the fight is far from over. The House of Representatives also passed a collection of amendments to the Senate bill by a 220-211 margin, but the Senate must also approve this reconciliation bill – exactly as it is worded. If that doesn’t happen, then guess what … there will be another vote on the Senate version of the bill in the House.(source)(source)
“If those people think they’re only going to vote on this once, they’re nuts,” Sen. Orrin Hatch (R-UT) said on Bloomberg Television March 20. Hatch claims that Senate Republicans have the votes to force a modification of the bill passed on March 21 and boot it back to the House for a second vote.(source)
Will the reforms be overturned? Twelve state attorney generals have already filed in court to contest the bill. The conincided with the moment President Obama signed the bill.(source) What are the odds the Supreme Court will throw the reforms out? Probably pretty slim. Look at the precedents of Medicare and Medicaid. When both those federal programs were enacted, the Court twice upheld a broad federal role in health care. Yet, is this time different? The bill has different mandates than Medicare or Medicaid.
The big reforms will take effect in 2014. If you are looking forward to health insurance reform, you will have to wait a while before many of the big changes occur.
• Starting in 2014, individuals will be required to have health insurance coverage or pay an annual penalty which could climb to $750 or 2% of their income (alternately $695 or 2.5% of income), whichever is larger. Inmates, Native Americans, and those with religious objections would be exempted.(source)(source)
• In 2014, if you aren’t enrolled in an employer-sponsored health care plan, you will have to buy coverage yourself. You could shop for it through a state insurance exchange. The federal government will offer $500 billion worth of assistance to help insurance shoppers buy coverage through these state exchanges. Undocumented immigrants would not be able to buy coverage.(source)(source)
• After 2014, businesses with more than 50 employees could be fined as much as $2,000 per worker for failing to provide the option of coverage.(source)
• In 2014, insurers will be required to provide coverage to all Americans regardless of their health status.(source)
• Medicare spending will be cut by about $500 billion over the next decade, mostly in reduced government payments to Medicare Advantage plans. Democrats have claimed this will not shortchange Medicare recipients.(source)
• Federal money coming from the bill could not be used for abortions, with exceptions made in cases of rape, incest, or danger to a woman’s life.(source)
What changes are about to happen in 2010? These new rules would go into effect presently thanks to the new law.
• Insurers will be barred from revoking existing health insurance coverage on an individual, unless fraud or misrepresentation can be shown.(source)
• Insurers will not be able to limit the amount of money that can eventually be paid out on a health care policy, and it will be harder to limit the amount of money that can be paid out annually.(source)
• Seniors will get $250 payments to help them out if they face a coverage gap in the middle of the Medicare Part D prescription drug coverage plan.(source)
• Children will be able to stay on their parents’ health care policies until age 26, and they won’t be denied coverage because of pre-existing health conditions.(source)
• Adults with pre-existing health conditions will get a chance to enroll in a national high-risk insurance plan – albeit a temporary one.(source)
• Small businesses that sponsor health care plans for their workers could qualify for tax credits of up to 50% of the cost of the premiums they pay.(source)
New taxes? Yes – starting in 2013. Approval of these reforms will also bring a new 3.8% tax on investment income for individuals earning more than $200,000 and households earning more than $250,000, so the effective capital gains rate will be 23.8% for these taxpayers in 2013. Also, these taxpayers will be able to keep 8.8% less of the income resulting from taxable stock investments. The Medicare tax rate on households with income over $250,000 will also rise in 2013, from 1.45% to 2.35%.(source)(source)(source)
A huge savings? Maybe. The non-partisan Congressional Budget Office estimates that the health care reforms will reduce the federal deficit by between $65-118 billion over the next decade and by more than $1 trillion in the decade after that.(source) The proof is in the pudding, as all large entitlement programs such as Social Security and Medicare are all currently bankrupt. Might this add insult to an already bloated national debt? If history is any indication, more than likely the cost of this legislation could be disastrous for the US economy. Time will tell.
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The Potential of the BRIC Nations
THE POTENTIAL OF THE BRIC NATIONS
Why emerging market equities have the world’s attention.
Brazil. Russia. India. China. These four nations have some of the fastest-growing economies on earth and are becoming drivers in the world economy. In the coming decades, they may command as much attention as the U.S., Japan and other “heavy hitters” … or more.
The future aside, we know one thing about the BRIC nations and other emerging markets: collectively, stocks in these countries have outperformed U.S. stocks for the last 20 years.
During this past decade alone, the MSCI Emerging Markets Index brought a total return of 102.4% while the S&P 500 posted a total return of -10.0% (-24.1% before dividends). Across the 1990s, the S&P 500 produced a total return of 432.0% - pretty impressive. Yet the MSCI Emerging Markets index posted a total return of 2408.6% for that decade.(source)(source)
Great volatility … but also great potential. If U.S. stocks soar or fall, emerging markets really feel the effect. We’ve seen them recoil in the first quarter of 2010. Yet short-term slumps aside, there are compelling arguments for investing in emerging market equities as part of a diversified portfolio.
Look at last year’s returns. In 2009, the benchmark index in Brazil (the Bovespa) gained 82.66%. Russia’s RTS gained 128.62%. India’s Sensex 30 advanced 81.03% and China’s Shanghai Composite rose 79.98%.(source)
