What factors need to be in place for this to happen?

Will the Mubarak government be toppled?Egyptians took to the streets in Cairo and other major cities Friday, facing riot squads and armored personnel carriers as they demanded political reforms and an end to the 30-year rule of the country’s president, Hosni Mubarak.

The Mubarak government shut down the nation’s internet providers and mobile phone network and imposed a nationwide nightly curfew within a 36-hour period Thursday and Friday. In response, a huge crowd surrounded the Cairo headquarters of Mubarak’s National Democratic Party (which was set on fire) and the nation’s key radio and television headquarters. Great Britain’s Telegraphreported that 870 in the crowd suffered injuries, with some protestors being shot.¹

How did the markets interpret the turmoil?The reaction was as expected: stocks dived, oil and gold prices immediately climbed and there was renewed interest in the dollar and U.S. government bonds.

Gold gained $22.30 (1.69%) on the COMEX, while oil rose $3.70 (4.32%) on the NYMEX. At the end of the U.S. trading day, gold settled at $1,340.70 per ounce and oil had topped $89 per barrel ($89.34). The U.S. Dollar Index moved north 0.55% on the day.^2,3

The Dow, NASDAQ and S&P 500 all tumbled Friday, though the descent also reflected disappointment over earnings reports from Ford and Amazon. On the day, the Dow fell 166.13, the S&P slipped 23.20 and the NASDAQ dropped 68.39.⁴

Basically, this is putting Europe on the back burner. For about a year, Wall Street has been watching the sovereign debt crisis in the EU. Now the focus shifts, or at least is split.

What if the Suez Canal is shut down? The possibility has come up given the level of Egypt’s unrest. It wouldn’t be just oil prices that would suddenly spike. Prices of other hard assets could rise as well, because the canal is a vital shipping channel for many other raw materials. Fear was back Friday: the CBOE VIX, the so-called “fear index”, was up 23.30 and hit an intraday high unseen since December 2.⁴
 

Was this simply the cue Wall Street had been looking for? There was the sense recently that stocks had been overbought, that some kind of selloff was coming. (After all, the Dow had been on an eight-week winning streak.) Friday’s events may have given institutional investors the sell signal they were waiting on – volume was considerable on Wall Street during the trading day.

Is this an isolated geopolitical event, or a spark?That, perhaps, is Wall Street’s biggest worry. Many observers think the demonstrations and unrest in Egypt were directly inspired by earlier protests in Tunisia and Lebanon. The big question is whether that inspiration will now spread to other Middle East nations with authoritarian governments, such as Yemen and Saudi Arabia. Today promises to be a very interesting day on Wall Street.

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

Citations

1 – online.wsj.com/article/SB10001424052748703296604576005430598327972.html [1/28/11]

2 –blogs.wsj.com/marketbeat/2011/01/28/data-points-energy-metals-449/ [1/28/11]

3 –cnbc.com/id/41314224 [1/28/11]

4 –marketwatch.com/story/us-stocks-waver-ge-microsoft-tug-at-dow-2011-01-28?dist=afterbell [1/28/11]

5 –montoyaregistry.com/Financial-Market.aspx?financial-market=the-financial-security-rulebook-5-crucial-steps&category=3 [1/28/11]

It was a weak year for equities, but foreign markets had it worse.

January 4, 2011
 

2011 had a definite downside. Statistically, 2011 may end up being characterized as the year stocks stood still: the S&P 500 lost .003%, its smallest year-over-year change of any kind since 1947. Yet it was hardly a placid year; every week seemed to feature big rallies and selloffs, and seemingly every time we checked in on a financial website or TV program, some new anxiety had emerged.¹


 

If it wasn’t the debt crisis in the European Union, it was legislators on Capitol Hill. If it wasn’t the housing market, it was the job market (and in truth, the two were inescapably linked). Investors were jittery, and as emotions affect stocks as much as earnings and fundamental indicators, the great broad index of the American stock market wound up generating a less than thrilling return.

 

However, there was also an upside. Is the glass half-empty or half-full at this point? That’s a good question. Bulls were heartened by the way U.S. stocks held up in 2011. Comparatively speaking, the rest of the world may be marveling at how well we did:

• DJIA: +5.53%
• S&P 500: -0.003% (+2.11% with dividends)
• NASDAQ: -1.80%
• Russell 2000: -5.45%^1,2,3

Now look at how these foreign indices fared in 2011, according to performance data from the Wall Street Journal’s website:

• DAX (Germany): -14.7%
• CAC 40 (France): -17.0%
• Bovespa (Brazil): -18.1%
• All Ordinaries (Australia): -15.2%
• Shanghai Composite (China): -21.7%
• Hang Seng (Hong Kong): -20.0%
• Nikkei 225: -17.3%⁴

The DJIA was a member of the “fortunate five,” one of just five consequential benchmarks around the world that managed a 2011 advance. The others? Indonesia’s Jakarta Composite (+3.2%), Malaysia’s Kuala Lumpur Composite (+0.8%), the Manila Composite in the Philippines (+4.1%) and Venezuela’s Caracas General (+79.1% in a nation where inflation is running at 26%).^4,5

 

So the evidence points to a degree of decoupling taking place last year. Stateside, investors may have been distracted and troubled by news about EU debt and a slowdown in manufacturing in the Asia-Pacific region, but there was still some residual confidence, which was bolstered in the fourth quarter by some positive news about consumer spending and retail sales, a declining jobless rate, a bit of life in what had seemed a moribund real estate market, and banks being more open to commercial loans. ⁶
 

Will our relative good fortune continue? In 2012, will Wall Street pay more attention to domestic indicators and earnings than the headaches plaguing other economies?

We are all interconnected, of course; financially, the world is a small place. It is very possible that the big market swings characteristic of 2011 will repeat in 2012; currently, few things move the market up or down like news from the EU. However, with many of the EU economies veering toward recession and emerging markets cooling down, a U.S. economy that might realize but a small percentage of growth may start to look very strong indeed to the rest of the world, and that offers hope that our financial markets may perform better next year than some analysts expect.
 

We can only hope that is the case!
 

Happy New Year!
 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

“A New Year’s Resolution is something that goes in on “year” and out the other.”

-       Author unknown

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Citations.

www.marketinglibrbary.net

1 - blogs.wsj.com/marketbeat/2011/12/30/for-the-sp-500-2011-bascially-never-happened/ [12/30/11]

2 - blogs.wsj.com/marketbeat/2011/12/30/data-points-u-s-markets-71/ [12/30/11] 

3 - www.cnbc.com/id/45824871 [12/30/11]

4 - online.wsj.com/mdc/public/page/2_3022-intlstkidx.html [12/30/11]

5 – www.cnbc.com/id/45807143 [12/28/11]

6 - money.msn.com/market-news/post.aspx?post=7a929e98-4d99-44cb-98c9-a0ef1c3151c4 [12/30/11]
 

February 25, 2010

You've probably been hearing a lot about Greece recently, and before that about Dubai--two countries that were in danger of defaulting on what economic geeks call 'sovereign debt,' which basically means their country's equivalent of Treasury bonds.  Dubai's problem was $26 billion in debt issued by Nakheel, its most prominent real estate developer, which was tacitly backed by the government.  Order was restored last December when neighboring Abu Dhabi provided Nakheel with a $10 billion loan.  Greece, meanwhile, has $28 billion in government debt due in April and May, and as you read this, the European Union is debating when and how to come to its rescue.

What you probably aren't hearing is that all of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) are having similar troubles, and that in all cases, the problems were visible, and warnings were raised by economists, years before the budget crises came to a head.   According to a report by The Economist, Greece's debt is now up to 112.6% of its gross domestic product.  Ireland's is 65.8%, Spain's is 54.3%, Portugal's is 77.4% and Italy's is 114.6%.  What makes Greece stand out is that suddenly foreign buyers are shying away from its government securities, sending the yield on ten-year notes soaring to 7.1%, and raising the cost of rolling over the debt--sending deficits even higher.

Why should we care about the PIIGS?  The fear is that if one country were to default on its debt, it could trigger a Lehman-type domino effect to other countries with shaky economies.

Sovereign debt defaults, and the potential for problems in Greece to spread around the world, are a major fear. This issue has undermined confidence, but the ultimate danger to the U.S. economy has been vastly overestimated in my opinion. Greece’s government owes about $400 billion, which is just 4% the size of the $10 trillion U.S. mortgage market. As of yet, we know of no major financial institution, either in the U.S. or abroad, with solvency issues because of Greek debts.

Of course, this is not the main issue. Many fear that a Greek default could drive up interest rates for other sovereign debt and in other markets, drive down debt values, and perhaps kick-off another financial panic. Fortunately, the potential for this issue to spin out of control is very small. In fact, there is a very good chance that this entire episode leads to some sanity in government spending and a better, more market-friendly future.

As of 2008, Greece had a top income tax rate of 40% and a value-added-tax (VAT) of 19%. In addition, employers paid 28% of salary for social security, while employees paid 16%. The debt issues in Greece have little to do with revenue; they have everything to do with the worldwide inability of governments to spend within their means. The same is true in the U.S. It is not tax rates that are the problem; it is spending that threatens solvency. Just look at Illinois and California. If these states raise tax rates again, more people will leave, hurting the attempt to raise revenue.

Even if Greece, Illinois, California or the United States itself repudiated their debt – declared they would make zero payments – they would all still have substantial annual budget deficits. At that point, the only fix would be to cut spending because no one would lend them money.

In the end, the only way for Greece and other political entities to fix their budget problems is to cut spending. Politically, this is very difficult. But, in tough times like today, when everyone is feeling the pinch, it is just as hard to convince other (EU or U.S.) taxpayers to bail out the scofflaws.

Riddle: Give the names of 2 U.S. state capital cities which rhyme but share no vowels.

The fear that haunts U.S. economists is that, at some point, the world's bond buyers will lose confidence that America will ever get its debt situation under control.  It also may be the underlying fear among people who attend the Tea Party rallies around the country.  The real deficit problems in the U.S., however, are not found in government spending, per se, but the amount of money promised to future retirees in various. forms.  Lately, various financial planning conferences have heard presentations by David Walker, former head of the U.S. Government Accounting Office, now president of the Peter G. Peterson Foundation.  Walker gives a terrific speech on how America is executing a reverse transfer of wealth from the younger generation and unborn to the Baby Boom generation.  He does exactly what economists were doing in Greece for twenty years before the meltdown: telling U.S. that the longer we wait to solve the problems, the more likely we are to face an unsolvable crisis.

Perhaps the easiest example to understand is Social Security, which was enacted during the Great Depression, at a time when the average person's lifespan was 65.  65 also happened to be the normal retirement year, which meant that most citizens collected no Social Security benefits at all; only those who lived an unusually long time would get back the money that was collected into the government retirement system.  Fast-forward to today, when the average U.S. life expectancy is 78.2 years, and it is not uncommon for people to live to age 100.  The same is true of Medicare; when it was enacted, people were expected to receive benefits for a year or two, not additional decades.  In all, according to "The Complete Idiot's Guide to Economics," 23% of the U.S. budget is spent on Social Security, 12% on Medicare, 7% on Medicaid; recently, Congressman Randy Forbes estimated that mandatory entitlements now represent 62% of all federal spending.

We are learning from European countries that spent too much for too long: the solution is not anger or warnings, but concrete action that addresses the real sources of fiscal imbalance--and perhaps most importantly, a willingness to sacrifice our way back to a balanced budget.  Walker proposes means testing for Social Security recipients, arguing that it makes no sense to send government checks to billionaires.  The government will have to ration health care and put it back on a budget.  He tells people what “you” already know, and what Greece and some of its neighbors are learning: it doesn't work any differently for governments than it does for people; the numbers are just a lot bigger.

Best regards,

Edward J. Kohlhepp, CFP^®, ChFC, CLU

Edward J. Kohlhepp, Jr., CFP^®, MBA

Quote: “We would worry less about what others think of us if we realized how seldom they do.” – Ethel Barrett

Riddle Answer:  Austin & Boston

Compiled from various sources, including Bob Veres & Advisor Perspectives

These are the views of the author, Bob Veres and/or Advisor Perspectives, and not necessarily those of Kohlhepp Investment Advisors, Ltd. or Cambridge Investment Research, Inc.  Past performance is not a guarantee of future returns.

The Bush-Era Tax Cuts Live On