Market Update - February 6, 2009

 
Welcome to 2009!  I was hoping by this time to have good news to report, but the year has gotten off to a rocky start.
 
In the next few paragraphs we are going to summarize some of the more significant events of the month of January and early February.
 
First and foremost, Barack Obama was inaugurated on January 20, 2009.  It was a monumental day with an impressive turnout in Washington, D.C.  The newly elected President hit the ground running on Wednesday the 21st.  Many had hoped the markets would find a reason to rally when the new regime took over.  However, the Dow fell 332 points on Inauguration day (the largest decline ever on that day), and January closed as another terrible month for the markets.  It was the worst January ever for the S&P 500 as it lost 8.4%.  The bad news keeps flowing in the form of poor earnings announcements, housing data, and job losses.
 
The Obama team is pushing hard to get the latest stimulus package signed into law by Presidents day.  They are also trying to determine how the next $350 billion in TARP will be spent.
 
The Banks
Because the banks are still struggling as a result of having toxic assets on their books, two strategies are possible going forward.  One is the “nationalization” of one or more of the large banks, the other is the formation of a so called “Bad Bank”.
 
A “Bad Bank” sometimes called an “Aggregator Bank” would be a new entity created to hold troubled assets purchased from financial firms.  The bank would not do any lending nor take deposits.  Essentially, financial firms would receive cash in return for their bad assets.  I will provide you with more details if the government decides to go in this direction.  Obviously this would be financed by the Treasury.
 
“Nationalization” – A nationalized bank is owned and run by the government.  It only makes sense if a large bank is about to fail.  In the U.S. the government took over hundreds of institutions during the S&L crisis.  If a bank is nationalized there would be little difference to the consumer.  Because of the cost and enormity of this task, the government would likely take over only a handful of the largest institutions.
 
 -        -        -        -        -        -        -        -        -       
Riddle:  I went into the woods and got it.  I brought it home in my hand and removed it.  What am I talking about? 
                                   Answer will be at the end of the letter
-        -        -        -        -        -        -        -        -       
 
RMD Waiver
Please note that the government is allowing a one year waiver (2009 only) of the Required Minimum Distribution from IRAs, 403(b) programs, and retirement plans for anyone over age 70 1/2.  For more details contact our office.  You may still take withdrawals, but you do not have to.
 
Tax “Cheats”
President Obama has run into difficulty with some of his cabinet nominees owing back taxes:  Tim Geithner (Treasury), Tom Daschle (Health & Human Services) and Hilda Solis (Labor).  Tom Daschle has withdrawn his nomination, Tim Geithner has been confirmed despite his tax problems, and Hilda Solis’ nomination has been delayed due to her husband’s tax problems.
 
Stimulus Package
Like it or not, it appears that a new stimulus package will be signed into law in the next week or so.  The House already passed its version.  The Senate is close to passing a slightly different version.  Then a conference committee will hash out the differences so that it can go back to Congress for final passage and then on to the President.  Once the final bill is passed, I will detail the main provisions in a future email.  The size of the stimulus will likely exceed $800 billion.
 
Unemployment
Layoffs continue and the January numbers were 598,000 additional jobs lost.  This raises the rate to 7.6% and the monthly job loss is the highest since 1974.  We still expect the rate to surpass 8% and approach 9% before the economy starts to turn.
 
Bernie Madoff
The list of Madoff clients has been released.  It is hard to believe that so many people were duped by this character.  Madoff perpetrated such an outrageous scheme on people who considered him a friend.  It is important to understand some red flags and differences in how legitimate firms operate.
 
  1. Never operate on a handshake.  The investment business requires signed documentation of new accounts.
  2. Never believe returns which are too good to be true.  Madoff reported consistent year-over-year returns, which should have been questioned.
  3. Your assets should be safeguarded by an independent custodian, such as Schwab, Fidelity, TD Ameritrade, etc.  We do not act as our own custodian, and are not permitted to hold clients’ assets.  You should always receive statements from the custodian not directly from the firm.
  4. Madoff was very secretive about his process.  This was his cover for everything.  It was all about an exclusive club which he “might” let you into.
  5. Never write your investment check to the investment firm.  It should always be made payable to the independent custodian, Schwab, Fidelity, etc.
 
There is no magic formula in our business.  If you ever have any questions, make sure you ask them and get satisfactory answers.
 
Conclusion
Things may still get worse.  The country is waiting for a stimulus package.  The entire populace has virtually deified President Obama and expect him to fix the economy, Wall Street, the housing market and health care all in his first 100 days.  Obama is not a miracle worker and it will take time.
 
The economy will not turn around soon.  The recession will likely last through the end of 2009.  Unemployment will get worse and GDP will probably contract at least through the third quarter.
 
The markets occasionally show glimmers of hope, but healthier banking systems are needed first.  If the S&P 500 can hold without breaking down below 800 again, this could be a foundation for at least a mini-rally.  We can only hope!
 
If you have any questions about the economy, the markets, or your portfolio, please call us.  If you are uneasy, let’s make an appointment.  We look forward to hearing from you.
 
 
Best regards,
 
 
Edward J. Kohlhepp, CFP®, ChFC
Edward J. Kohlhepp, Jr., CFP®, MBA
 
 
"People try to live within their income so they can afford to pay taxes to a government that can’t live within its income."  ~Robert Half
 
"Blessed are the young, for they shall inherit the national debt." ~Herbert Hoover
 
Answer to Riddle:  A splinter

 

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Kohlhepp Investment Advisors, Ltd.
3655 Route 202, Suite 100
Doylestown, PA 18902
Phone: 215-340-5777
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