Ed's Eye on the Economy

Market Update - December 12, 2008

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Friday, December 12 2008

Ed's Eye on the Economy

Happy Holidays!

Today’s December 12^th market update is meant to bring you some perspective on the markets in light of all the swirling (mostly bad) news about the economy.

In rising markets, investors are prone to believe the most outrageous claims by market bulls. In the same way, in negative markets, such as what we are experiencing now, investors tend to believe even the gloomiest assertions from media gurus and self-appointed experts.

The Recession – how long will it last?

Now it’s official, the National Bureau of Economic Research (NBER) proclaimed the recession actually began in December, 2007, not July of 2008. The key question is how long will it last and how deep will it get?

First, let’s dispel any thoughts and comparisons to the Great Depression. We do not and will not have 25% to 30% unemployment. We will not have a collapse of the banking system or the failure of thousands of banks. During the Depression, there was no FDIC insurance and no unemployment insurance.

The recession is already 12 months old and hasn’t reached its trough yet. Unemployment and economic news will get worse before it gets better. This recession will be longer than the average of 10 ½ months and will approach or exceed the 16 months of the recessions of ’73-’75 and ’81-’82 making it the longest since the Depression. The healing process of a deeply wounded banking system will not allow for a sharp recovery. That said, we believe we will see an end to this by mid 2009. The recovery will be gradual but will be precipitated by the enormous stimulus package of between 500 billion and 1 trillion dollars which President-elect Obama will sign into law on or shortly after Inauguration Day.

The stock market is a discounting mechanism – it turns down before a recession begins and turns up again about 3 to 6 months before the end of a recession. This is not a prediction that the recession will end exactly then, or that the market will leap forward dramatically any day. However, if history is any guide , and it usually is, the market will probably not wait for CNBC, MSNBC or any other network to admit the recession is over before taking off on its next strong upward move.

Rebuilding your portfolio

History has shown that the best way to rebuild portfolios is to stay invested in the stock market. Other than during the Depression, any calendar year in which the S&P 500 has declined more than 20%, the following calendar year it has risen more than 20%. Harold Evensky, author and financial planner, says “this is likely to be one of the best buying opportunities.” Keep in mind that even if you are retired, you are not going to spend all of your money in the next two years. Therefore, staying invested for the long term is still the best strategy.

Market Update

We, and many other noted investment strategists, believe the market is in a bottoming process. This process could take a few more months before we build a springboard to subsequent gains. The firm of Goldman Sachs put out a report on December 8th citing the following:

They expect the macro-climate to stabilize in 2009
They expect better opportunities for stock picking to arise
They expect the earnings per share (not the stock prices) of the S&P 500 to decline by 5% in 2009, but rise by 31% in 2010
Goldman’s year end 2009 target for the S&P 500 is 1100, about 26% higher than current levels

As of this date, the Auto bailout has stalled but I do hope (expect) Congress to reach a compromise agreement over the weekend with prodding by President Bush. Or President Bush may release some of the funds earmarked elsewhere.

Holidays

As we enter this holiday season, let’s be thankful for all of our blessings. The love of family and friends and the loyalty of clients are certainly some of our most treasured blessings.

We wish you and yours a happy and healthy holiday season.

Best Regards,

Edward J. Kohlhepp, CFP^®, ChFC
Edward J. Kohlhepp, Jr., CFP^®, MBA

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Market Update - November 26, 2008

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Wednesday, November 26 2008

Ed's Eye on the Economy

UNPRECEDENTED MOVES FOR UNPRECEDENTED TIMES

President-elect Obama has been pulling out all of the stops in an attempt to avert an economic freefall. Normally between Election day and Inauguration day very little is heard from the newly elected President. Well, Barack Obama has been holding press conferences and appointing members of his cabinet and advisory team in order to instill confidence in the banking and financial systems.

What has happened in the last few days?

President-elect Obama has announced the following appointments:

Tim Geithner as Treasury Secretary
- Vice chairman of the Federal Open Market Committee (FOMC)
- President of the N.Y. Federal Reserve Bank
- Worked since 1988 in various capacities for presidential administrations
Larry Summers as Director of the National Economic Council
- Former Secretary of the Treasury
- Economics professor at Harvard and president of Harvard from 2001-2006
Christina Romer as Chair of the Council of Economic Advisers
- Economics professor at University of California – Berkeley
- Member of the National Bureau of Economic Research’s Business Cycle Dating Committee
- Published three papers this month alone analyzing tax policy and its fallout on the economy
- PhD from MIT
Peter Orszag as Director of the Office of Management and Budget (OMB)
- Former director of the Congressional Budget Office
- PhD from London School of Economics
- Former economic adviser to President Clinton
Melody Barnes as Director of the Domestic Policy Council
- Former Chief Counsel to the Senate Judiciary Committee
- Executive Vice President for Policy at the Center for American Progress
Paul Volcker, former Federal Reserve Chairman was appointed to a new White House advisory board charged with helping lift the nation out of recession.
Officials have confirmed that Robert Gates will be retained as the Secretary of Defense.
Retired Marine General James Jones will likely be the new National Security Adviser.
It is rumored that Hillary Clinton will be appointed as Secretary of State.

Economic News

Citigroup was “bailed out” this past weekend. The government is injecting another $20 billion on top of the $25 billion put in previously. The government is also guaranteeing $306 billion in risky assets.
The Big 3 Automakers were told to come back to Congress with a “plan”, before the government will use any of the TARP funds to bail out the ailing companies.
It is now rumored that the fiscal stimulus package that will be passed by Congress in January will be in the $400-$500 billion range, possibly higher, and will include:
- Aid to ailing states
- Extended unemployment benefits
- Tax rebates
- Infrastructure spending which is expected to add about 2.5 million jobs
- Direct aid to homeowners
New stimulus package for $800 billion unveiled on Tuesday, November 25^th – The Fed plans to purchase $600 billion of debt issued by Fannie, Freddie and Ginnie Mae. In addition the Fed will provide up to $200 billion in direct financing to investors buying securities tied to student loans, credit card loans, and car loans. This immediately pushed mortgage rates lower.

Finally, during these turbulent times, we all too often spend too much time listening to the media as they sensationalize the “Crisis du Jour”. However, let’s spend some time counting our blessings. Look for the good in each day.

Happy Thanksgiving!!

Best Regards,

Edward J. Kohlhepp, CFP^®, ChFC
Edward J. Kohlhepp, Jr., CFP^®, MBA

“Tomorrow is a mystery. Today is a gift. That is why it is called the present.” --Eleanor Roosevelt

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Market Update - November 7, 2008

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Friday, November 07 2008

Ed's Eye on the Economy

CRISIS UPDATE

What a week!

Election

We have a new president, Barack Obama, the first African American president of the U.S. Possibly of more far reaching proportions, is the fact that the Democrats will control somewhere between 54 and 58 seats in the Senate (4 seats are still being contested). The House is overwhelmingly controlled by the Democrats. It was not a good year to be a Republican running for office – it was impossible for almost any Republican to distance him or herself far enough away from the Bush taint.

Markets!

Losses on Wall Street mounted on Thursday (11/6) on top of the downturn on Wednesday. Apparently the market’s first reaction to President-elect Obama was not a good one. We did have a nice Election Day rally of over 300 points but there was enough bad news on Wednesday and Thursday to cast a further pall over the markets.

The number of Americans filing for unemployment benefits climbed to the highest level since 1983. The rate is up to 6.5%.
Wall Street analysts lowered their estimates on corporate profitability in the current financial quarter.

On a brighter note, the Swiss and British Central banks as well as other European Union banks cut their short term rates substantially this week. This was not welcomed as much as it could be because economists are fretting over signs that the world’s economy is slowing faster than expected.

What an inheritance!

Among other problems, President-elect Obama will be grappling with many serious issues early in his tenure including:

Massive government deficits
A fragile credit system
A domestic recession
Rising unemployment
The Wall Street downturn
The Iraq war
Many other issues, including income taxes

The new Treasury Secretary

Some of the early names being bandied about to take over for Secretary Paulson are:

Paul Volcker – former Fed chairman
Lawrence Summers – former Treasury Secretary under Clinton
John Corzine – N.J governor
Robert Rubin – former Treasury Secretary under Clinton
Jamie Dimon – JP Morgan Chase CEO
Timothy Geithner – NY Fed president

Conclusion

Whether you are Republican or Democrat, I think we would all agree that the “run” for President (over two years) was much too long. I personally am glad it is over. I was tired of the negative attack ads.

Many people believe that a Democratic president is bad for the markets. History has proven that NOT to be the case. What the stock market likes is certainty. We now know who the President is. What his policies are will take somewhat longer to learn and understand.

The market recovery will be bumpy. We are likely to see more of these “teases”, with rather large up days followed by large down days. However, an eventual rebound in the economy and investment values will occur. And historical evidence indicates that the market recovery is a precursor to the economic recovery.

We understand that it is difficult to remain committed to long term investing in the face of so much short term doom and gloom – but we have a lot of confidence in the future.

As always, call us at anytime if you have any questions.

Best Regards,

Edward J. Kohlhepp, CFP^®, ChFC
Edward J. Kohlhepp, Jr., CFP^®, MBA

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Market Update - October 31, 2008

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Friday, October 31 2008

Ed's Eye on the Economy

TRICK OR TREAT?

October has been a month that has been jam-packed with “tricks” and horribly short on “treats”.

Let’s briefly review some of the key happenings of the last week or so:

Trick

The economy shrunk in the third quarter as consumers cut back on spending. The GDP shrank at a negative 0.3% annual rate. It appears GDP will probably be negative in the fourth quarter as well; this would confirm the recession.

Trick? Treat?

The government is considering a plan that would help 3 million homeowners avoid foreclosures. A deal is pending which would allow $50 billion from the “rescue bill” to guarantee $500 billion of mortgages. This could help restore confidence in the market for securities backed by mortgage loans. That is where the global credit crisis started.

Trick

GM, in an attempt to stave off possible bankruptcy, has been involved in talks to acquire Chrysler. GM is burning through more than $1 billion per month as it deals with slowing auto sales and a global recession. GM is pursuing $5 to $10 billion in aid from the government. Why would the government help GM??? GM has 177,000 U.S. workers and about 500,000 receiving pensions. It is estimated that there are an additional 7.5 jobs with parts makers and other supply companies for every automotive job. That is a lot of jobs!

Treat

The Fed cut rates by ½% to 1% on Wednesday. This is an attempt to revive an economy hit by the most severe financial crisis in decades. The 1% rate is the lowest since 2003-2004. The hope is that other countries will follow with rate cuts in the next few weeks.

Treat

Credit is beginning to free up as is evidenced by the spread between LIBOR and the Federal Funds rate.

Rate	Now	1 week ago
Federal Funds	1%	1.50%
LIBOR 3 month	3.19%	3.54%

Note: Rate cuts do matter. It causes an injection of additional reserves into the banking system. Many loans will have their rates adjusted downward, enabling companies to borrow at lower rates.

Treat

Gas prices declined this week to $2.59 per gallon for regular. As Larry Kudlow, MSNBC economist states: “This is like a tax cut for Americans.”

Trick (Terrible Trick)

October, when the market closes today, will wind up being the worst October since 1987. The markets will likely finish down between 15% and 20% for the month. Maybe the markets should just stay closed during the month of October!

THE BIGGEST TREAT OF ALL!

The Phillies won the World Series and are world champions of baseball. This ends the “Philadelphia curse” of 25 years without a major championship.

Happy Halloween and thank goodness October is over!

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC

Edward J. Kohlhepp, Jr., CFP^®, MBA

“Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value”.

Warren Buffet, NY Times 10/17/2008

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Market Update - October 23, 2008

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Thursday, October 23 2008

Ed's Eye on the Economy

I FEEL LIKE A WRESTLER

Over the last week, I have started to feel like a wrestler for the WWF (World Wrestling Federation). I thought, here I am, a 170 pound weakling being thrown into the ring with a 300 pound guy. After the gorilla beat me up for about 10 or 15 minutes, I realized that I had survived and I was about ready to leave the ring. Then the 300 pound wrestler tagged up with his partner, who was a 320 pound guy, and just when I thought I was getting a reprieve, he came in and pounded me again, mercilessly.

I’m sure that is how we all feel after a few months of this market pounding. It is like we have been pounded mercilessly by the markets with a few daily reprieves of a 900 point up day, a 700 point up day, and two 400 point up days; then without notice the market takes back almost everything it gives us.

What I would like to do at this stage is bring you up to date on a few occurrences with regard to the markets and what is happening.

Paulson Speech

Secretary of the Treasury Henry Paulson gave a speech on October 21^st, and his key points were as follows:

1. The current challenges in the credit markets will continue for a number of months.

2. The U.S. Government will do whatever is necessary to strengthen the banks and the financial institutions.

3. World governments must continue to take individual and collective action to stabilize the financial markets.

4. The 20 largest countries are supporting the stabilization process.

5. The recent actions of the government and the FDIC are powerful and will unlock the credit markets.

6. China (despite the slowdown) will remain an important engine of financial growth.

7. The world financial markets are undergoing the most serious financial stresses in recent memory.

New stimulus package

Yes, Congress has proposed a NEW stimulus package and Fed Chairman Bernanke endorsed the package when he testified before the House Budget Committee earlier this week. The package could cost between $150 and $300 billion and “seems appropriate” according to Bernanke.

Nancy Pelosi suggested the bill should include new spending on infrastructure, aid to cash-strapped states, extended jobless benefits and possibly a tax cut. President Bush wants a plan that would “actually stimulate the economy.”

The Democratic leadership is considering calling lawmakers back to town after the election to vote on this package.

My note: Where is all this money coming from? The printing press must be running overtime.

The Credit Markets

In order to understand the credit markets, you need to understand LIBOR.

LIBOR

London Inter-Bank Offered Rate. This is the interest rate that banks charge each other for loans (usually in Eurodollars). This rate is applicable to the short-term international interbank market and applies to very large loans borrowed for anywhere from one day to five years. This market allows banks with liquidity requirements to borrow quickly from other banks with surpluses, enabling banks to avoid holding excessively large amounts of their asset base as liquid assets. The LIBOR is officially fixed once a day by a small group of large London banks, but the rate changes throughout the day. It is for non-collateralized loans.

This global inter-bank market provides a means for financial institutions with excess capital to earn higher rates of return by lending liquid assets to those in need of the funds.

LIBOR is important because it is often used as the base for variable-rate government and corporate loans, mortgages, and derivative-based products such as credit swaps.

The Discount Rate

The Discount Rate is the interest rate banks are charged when they borrow funds overnight directly from one of the Federal Reserve Banks. When the cost of money increases for your bank, they are going to charge you more as a result. This makes capital more expensive and results in less borrowing.

The Federal Funds Rate

The Federal Funds Rate is the rate that banks charge each other for overnight loans. These loans are backed up by the Fed; LIBOR based loans are not.

“Why would one bank borrow cash from another?” you ask. The Fed can require banks to keep a certain percentage of assets in the form of cash on hand or deposited in one of the Federal Reserve banks. From time to time, The Fed will establish a required ratio of reserves to deposits; when this ratio is increased, more cash must be kept in the vault at night, making it more difficult (and expensive) for funds to be acquired. When the reserve requirement is lowered, the money supply is loosened; because less cash has to be kept on hand it becomes easier to acquire capital.

The Thaw

There is one positive development in the last week. The frozen credit markets are slowly showing signs of a thaw. The three month LIBOR rate on Wednesday the 22nd had dropped to 3.54%, while the Federal Funds Rate was 1.5%. One week ago the three month LIBOR was 4.64% versus a 1.5% Federal Funds Rate. This is a very important credit indicator.

Type of Rate

10/22/2008

Week Ago

3 Month LIBOR

3.54%

(lowest since 9/24/08)

4.64%

Federal Funds Rate

1.50%

The narrowing of the credit spread between the three month LIBOR and the Federal Funds Rate shows that credit is starting to loosen. You will hear more and more on the news stations, especially CNN and MSNBC, about the LIBOR rate. If the LIBOR rate continues to decline, this is a very positive sign with regard to credit loosening. It is also a very positive sign that the government’s plan is beginning to work.

~ ~ ~

In the weeks to come, we will bring you more information with regard to what is happening in the markets, what is happening in the economy and what is happening in the credit markets. We expect the equity markets, as well as the fixed income/bond market to continue to be bumpy for the next several months. However, there are some positive signs developing, even though the earnings reports of corporations currently are disappointing.

~ ~ ~

Warren Buffett of Berkshire Hathaway fame wrote in the New York Times recently that he has been buying U.S. stocks. “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.”

Best Regards,

Edward J. Kohlhepp, CFP^®, ChFC

Edward J. Kohlhepp, Jr., CFP^®, MBA

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