Last week’s data, next year’s economy

The numbers are in. Retail sales are up two months running. Black Friday online sales were up 26% over last year. Industrial production is up. Permits for new single-family homes are at their highest point in a year and a half. Inflation is down, and the number of people applying for jobless benefits is near the lowest point since April. The economy may not be dancing a jig, but it has risen from its deathbed and is up and walking around. Few, if any, economists are predicting a double-dip recession; their consensus estimate puts fourth quarter GDP growth at 2.5%

So why was the S&P 500, the broad measure of market performance, down 4.8% for the week after being down 3.5% the previous week?

One reason is questions about the long-term sustainability of the recovery. Roughly 70% of GDP is consumer spending. And consumer spending is dependent on people having jobs. The economy added 80,000 jobs in October, down from 158,000 in September and 104,000 in August. It needs to do much better, at least 200,000 per month in order to reduce the current 9.0% unemployment rate. The growth in retail sales can’t continue unless hiring increases and wages rise. Neither of those things is happening at a self-sustaining rate.

The other reason is Europe, which promises to be a source of financial instability for the foreseeable future, and a drag on the confidence of American markets and businesses.　

In the short term the cascading series of potential failures, Greece to Italy to Spain to France, has financial markets unsettled; banks on both sides of the Atlantic own trillions in European sovereign debt.

In the medium term Europe faces the likelihood of recession, in large part due to the failed policy of budget cutting to trim deficits instead of spending to create job growth. That means decreased demand for American goods from our biggest trading partner and fewer American jobs created.

The net: uncertainty continues to reign on Wall Street, on Main Street, and across Europe, so it is important to keep your portfolio diversified. We’re watching the markets and keeping our options open to make prudent investment shifts as necessary.

James Copenhaver, Director of Investment Management

Current Economic State: “Shaky Stability”

A respected economist recently referred to our current economic state as “shaky stability.” It isn’t often that an oxymoron is more than an amusing description, but this one is particularly apt.

Unemployment is stuck at 9% and has been since spring. Job growth is stuck at an average of 72,000 per month and has been since spring also. The economy is creeping along just fast enough to employ new workers entering the labor market, but not fast enough to budge unemployment. We’re not in a recession, but we haven’t recovered from the last one either.

That’s the stability part, and it isn’t a good stability.

The economist didn’t talk much about the shaky part, but it’s pretty clear. The U.S. political process is shaky, with the two parties unable to agree on measures that would lead to economic recovery and growth. Europe is shaky, with the countries of the Euro Zone unable to agree on measures that would save their banks from the cascading failures resulting from a Greek default. Even China, the engine of global growth, is shaking a little as its furious rate of modernization inevitably slows.

The Greek default situation right now is the event most likely to shake the stability. A solution to the Greek debt crisis, or measures that would spur U.S. job growth, could inspire business and consumer confidence that would lead to long-term, self-sustaining economic growth.

The future is uncertain. Stay tuned.

James Copenhaver, Director of Investment Management

 

FOOTNOTE:

Economist Jared Bernstein:  http://jaredbernsteinblog.com/jobs-report-second-impression-shaky-stability/

President Obama and Fed Chairman Bernanke Give Speeches on the Economy

On Thursday, September 8, both President Obama and Fed Chairman Bernanke gave speeches on the economy.

Most of what Bernanke said, he’s said before. After all, American business is sitting on huge amounts of cash that it isn’t investing. It isn’t borrowing to grow either. The Fed has done everything non-inflationary that it can to send interest rates to historic lows to encourage spending. Spending isn’t happening, so what more can the Fed chairman say?

Something interesting.

Bernanke said he thought Americans were overly pessimistic about the economy. Given the numbers on wages, debt, loan rates and housing prices, consumers should be spending more, creating demand and growing the economy. Instead, they’re doing exactly what business is doing: not spending. The cycle of pessimism feeds on itself, stifling demand, which in turn stifles growth.

Perhaps the main cause of that pessimism is unemployment and the lack of job growth. That’s where President Obama’s speech comes in. The American Jobs Act that he proposed has $240 billion in employee payroll tax cuts through 2012, tax cuts for small businesses, and a small business tax holiday for hiring new employees. It has $140 billion for modernizing schools and for repairing roads and bridges. It has $35 billion for saving teacher jobs and hiring new teachers.

Moody’s Analytics’ chief economist Mark Zandi says the president’s jobs package would likely create 1.9 million payroll jobs, grow the economy by 2%, and cut unemployment by 1%.

Is it big enough? Maybe. It needs to go beyond staving off another recession to jumpstart self-sustaining growth for the economy. Is it apportioned right? Maybe. Direct spending is historically more effective than tax cuts, but tax cuts work.

And can it be passed by the most bitterly divided Congress since the 1850s? We’ll see.

James Copenhaver, Director of Investments

A Debt like No Other

If you have incurred inefficient debt, one method of eliminating it is to transfer the debt to your home equity. Many people are reluctant to use their home equity to consolidate other debt. This reluctance really stems from a mind-set that is behind the times. Certainly, 30 years ago, if people refinanced their home or took out a second mortgage, you can be sure the neighbors were talking behind their backs about their financial woes. But using your home’s equity is economically wise. It provides low interest rates, a tax deduction, and an extended amortization.

However, even this form of debt should not be used recklessly. Defaulting on a mortgage of any kind has greater consequences than defaulting on consumer loans. Mortgage loans are secured by your home, which means that if you can’t make payments, you will lose your home. Consumer credit lenders cannot take such drastic remedies.

Avoid all other kinds of debt, including the high-risk debt of stock margin purchases and stock and commodity options. Leave those investments to the professional gamblers. Otherwise, buy only what you can pay for with cash.

Proposed Reforms (Part 2)

Consumer Lending Rules – Last Wednesday, the House passed a bill by a wide margin to move up the start date to limit banks’ rate increases on existing credit-card balances. The Financial sector swooned by a few percentage points as soon as the bill passed. There will be increased scrutiny of many of the lines of lending from credit cards to student loans.

Credit Default Swaps – Right now, many derivative agreements are private one-on-one contracts in what is called the over-the-counter market. These opaque transactions are outside the view of the public or regulators and are dependent upon the parties remaining solvent. If one party becomes insolvent, it may take the other with it. This lack of transparency in volume, size, and counterparties proved disastrous in the financial crisis.

In the bailout of American International Group, tens of billions of dollars went to settle these contracts to avoid a domino effect. The reform proposals require that many derivatives be traded on public exchanges providing transparency on the volume and size of the market and providing each party an exchange whose creditworthiness would be backed by the entire industry. Forcing these contracts to be traded on an exchange may limit the risk they pose to the financial system.

Shopping for a Lender (Part 2)

It is just as important to look for a lender with a reputation for integrity and service. You will be sharing all of your most private financial information with your loan company. Signing for a loan is a big commitment, so make sure that you feel comfortable with your lender. Here are some important items to consider when shopping for a mortgage lender:

Rate Commitment
Many lenders quote an interest rate at the time of application. However, if market interest rates should go up or down during the period before you close on your loan, you need to find out what interest rate you will ultimately be charged. It is also important to know how long the lender will commit to this rate.

Loan Servicing
After your loan is closed, you will be dealing with a loan servicing company. The loan servicing company will accept your payment every month and handle any questions you may have concerning your mortgage balance. Many lenders service their own loans while many others sell their servicing to outside firms. You should know upfront that the lender you choose works with reputable loan servicing companies.

Considering the cost involved, your final choice of a lender should be one who offers you a good deal financially. However, keep in mind that you will be dealing with your lender for many years and it is always easier to deal with people you like and trust.

Shopping for a Lender (Part 1)

When shopping for a mortgage lender, you should make price comparisons, but interest rates alone should not be the determining factor in choosing a lender. Here are some important items to consider when shopping for a mortgage lender:

Fees
Mortgage lenders charge fees for a variety of things such as filing an application, appraisal, credit reports, etc. Be sure to know upfront what the lender charges are so that there are no surprises at closing. Lenders are required to state interest as an annual percentage rate (APR). This rate takes into account the loan origination fees. When comparing interest rates among various lenders, be sure to use the APR as your measure.

Processing Time
What is the average length of time for a mortgage loan to be processed? This is an important question to ask if you need to move into a home quickly.

Final Words on Debt

If you have incurred inefficient debt, one method of eliminating It is to transfer the debt to your home equity. Many people are reluctant to use their home equity to consolidate other debt. This reluctance really stems from a mind-set that is behind the times. Certainly, 30 years ago, if people refinanced their home or took out a second mortgage, you can be sure the neighbors were talking behind their backs about their financial woes. But using your home’s equity is economically wise.

It provides low Interest rates, a tax deduction, and an extended amortization.

However, even this form of debt should not be used recklessly. Defaulting on a mortgage of any kind has greater consequences than defaulting on consumer loans. Mortgage loans are secured by your home, which means that if you can’t make payments, you will lose your home. Consumer credit lenders cannot take such drastic remedies.

Avoid all other kinds of debt, including the high-risk debt of stock margin purchases and stock and commodity options. Leave those investments to the professional gamblers. Otherwise, buy only what you can pay for with cash.

Final words on debt. When to use it: rarely. How to use it: to increase your net worth or long-term quality of life, not to buy more things…