When I was trying to decide what to name this newsletter, I came across the name of a recent animated movie called “Cloudy with a Chance of Meatballs”. I thought to myself, “What the heck does that mean?” I had no idea and neither did several other people I asked. Well, the point is that no one can really forecast where either the economy or stock market is headed! Is the economy slowly growing its way out of recession, or are we headed back into a double-dip recession? Is the stock market ready to resume its upward trend or more likely to stay range bound, thereby teasing its investors – giving us some gains and then taking them back?
In the next few paragraphs I will give you my take on the economy and the markets as we sit today. This is not meant to be all encompassing, but an overview of the present situation.
THE ECONOMY
· The housing recovery seems to be moderating as government incentives expire. Even with the lowest mortgage rates (maybe) ever, nothing seems to spur the housing market. Alan Greenspan remarked recently that a large number of homes would go "underwater” if prices slipped another 5 to 7%.
· GDP grew at a 2.4% annualized rate in the second quarter; reasonable, but not enough to bring unemployment down significantly.
· THE OIL SPILL - even though the oil well has now been plugged, the GULF COAST disaster and its impact will be felt for decades. It already appears as if the government and media have pushed it to the back page because it is now perceived as “less” of a problem. Tell that to the people who live there.
· An effete Congress has passed two bills of more than 2000 pages each in the last few months. Of the 100 Senators and more than 500 Congressmen, how many do you think read every page? Obama’s Health Care Reform bill and the latest Financial Industry Reform legislation have each created new government agencies (and government jobs) to “help” our government be more effective at controlling the problems in health care and reducing the risk of problems on Wall Street. It appears that Congress has decided that more government is better than less! By the way, have you noticed that there are no federal estate taxes in 2010 because Congress did not get around to passing any legislation that would have either enacted a new federal estate tax or extended the existing legislation from 2009? George Steinbrenner’s family is certainly happy to have saved about 500 million dollars in federal estate taxes.
THE MARKETS
After a tremendous first quarter, the markets gave back all of their gains in the second quarter. A nice July recovery pushed the DOW back into positive territory for the year.
WHAT IS POSITIVE ABOUT THE MARKETS:
· Some of the largest companies have very low price/earnings ratios.
· S&P 500 companies have between 800 billion and 1 trillion dollars in cash on hand. They could use this to make acquisitions, pay dividends, make business investments, buy back shares, or hire workers. Each would be good for the markets.
· With Fed rates effectively at zero, it is hard to find other places to invest money.
WHAT COULD BE NEGATIVE?
· The economy is still shaky – if Congress introduces a large tax increase, albeit only on the “wealthy”, this could throw us back into recession.
· Bank failures this year are on pace to be the most since 1991 – 103 so far this year.
· Consumer confidence is weak.
· Unemployment shows no signs of improvement.
· Sovereign debt problems in Europe, although stabilized, are not fully resolved.
· Out of control deficits
SUMMARY AND CONCLUSION
It is unlikely that the recent market volatility will abate anytime soon. The transition from a government induced stimulus rebound to organic growth will likely be quite uneven, with formidable challenges. Whether we avoid a double dip recession is still up in the air, and the forecast for both the economy and the markets is still “Cloudy with a Chance of Meatballs.”
My collaborator, Ed Jr, was not able to contribute to this issue of Ed’s Eye on the Economy because he is currently recovering from jaw surgery. The surgery was a success and he is doing well! We hope to have him back in the office in mid-August. Thanks for all of your support and concern.
As always, please feel free to pass this newsletter on to family and friends. If you have any questions or want to talk more about your portfolio or the economy, please call.
Sincerely,
Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA
“It is incumbent on every generation to pay its own debts as it goes, a principle which if acted on would save one half of the wars in the world”
-Thomas Jefferson
The views expressed are not necessarily the opinion of Cambridge Investment Research and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Investing is subject to risks including loss of principal invested. No strategy can assure a profit nor protect against loss.
SOURCES:
Peter Montoya, Inc
www. Hussman funds.com
www.blackrock.com
www.charlesschwab.com
www.navellier.com
www.kiplinger.com
www.businessweek.com
www.ritholtz.com
www.gluskinsheff.com
www.morningstar.com
www.frontlinethoutghts.com
www .wsj.com
