Orders for durable goods in the US declined 6.2% last month, the biggest monthly decline in two years.  Additionally, consumer spending declined 1%, in spite of a modest increase in personal income.  Revised US GDP in the 3^rd quarter was down .5%, the worst decline in seven years.  Consumer spending has had the sharpest drop since 1980. 

Internationally, Euro zone unemployment hit 7.7% in October, the  highest since January, 2007.  Industrial production in Japan fell 3.1% in October, more than expected.  The World’s # 2 economy has contracted in industrial production for the first 3 quarters of 2008, and forecasts of Q4 industrial production is down 8.6%.  Forecasts are for a severe recession in Japan. 

As for companies, the Big Three automakers are returning to Washington DC requesting $25 billion to provide cash to operate in 2009, without which, all would run out of money and face bankruptcy.  Congress is requesting a plan to return to profitability, that also provides payment of its long-standing pension obligations, that increases fuel efficiency, and limits executive pay.  Citibank rose 120% last week, from the government’s $20 billion injection into the bank, and the guarantee that the government will bear losses above $29 billion on the bank’s $306 billion of poor quality, loss-producing assets. 

Markets

The 10 year Treasury note now yields 2.92%, a 50 year low, down from 3.79% two weeks ago.  It represents a flight to quality, and current Federal Reserve policy to provide liquidity and lower money rates. 

Most equity market indexes rose for the week, as this week was one of the best for investors in all of 2008.  The short week made for light volume, especially on Friday, when most people were enjoying the Thanksgiving holiday.  For the week, the NYSE Composite rose 12.9%, the S & P 500 rose 12%, the NASDAQ Composite rose 10.9%, and the DJIA increased 9.7%, despite bad economic reports. 

As of Friday, November 28, 2008, the S & P 500 was down 39%, while the NASDAQ Composite was down 42.1%, and the DJIA is down 33.44%.  Internationally, the Morgan Stanley developed markets index is down 45.7% in USD terms, while the emerging markets index is down 59.8% in USD terms. 

Impact of the current recession

Many technology companies, such as Dell, Cisco, & HP all plan to extend furloughs over Christmas, to reduce hours and costs.  Companies are attempting to first reduce hours, before cutting jobs.  It is likely that if the recession continues, these companies will cut jobs.  The state of California plans to do the same, as do the three US automakers and Toyota. 

Russia is having a difficult time these days economically.  They have spent $148 billion to defend their currency, the rouble.  It is likely Russia will have to devalue the rouble to avoid losing their remaining $325 billion in currency reserves.  At present, Russia is cutting oil & gas projects. 

Federal Reserve Policy

The Federal Reserves mantra these days is to do “whatever it takes”.  The Federal Reserve did some novel things last week.  First, it created a $200 billion facility to buy asset backed securities, including mortgages.  This will be used to buy newly issued asset backed securities, such as credit card loans, mortgages, student loans, auto loans, etc., which will supply new credit to American consumers.  This is very significant.  It means that the Federal Reserve for the first time will be a direct lender to consumers.  Going forward, many homeowners will be sending their payments to the Federal Reserve.  And the program will also include other consumer lending, to supply credit to consumers.  This new facility was created because banks, in spite of capital injections by the US Treasury, are not lending. 

Secondly, the Federal Reserve promised to buy $500 billion of mortgage backed securities from Fannie Mae & Freddie Mac, two government sponsored enterprises, which have issued $6 trillion worth of securities.  The current Trouble Asset Rescue Plan (TARP) created by the Treasury was created to buy bad mortgage assets, which had wiped out bank capital, and was meant to provide liquidity to the banks.  Since US financial institutions needed capital, that is the primary use so far of the TARP funds.  All but $20 billion of the first $350 billion has been committed.  Still, there is the need to buy these assets, so the Federal Reserve will do this also. 

Thirdly, the Federal Reserve committed to buying $100 billion of Fannie Mae & Freddie Mac’s direct debt.  So the Federal Reserve will be recapitalizing these two government sponsored enterprises.  Together, they hold $6 trillion of securities, which if they were combined as commercial banks, would be larger than the current three largest US banks, Citibank, Bank of America, and JP Morgan.

The Federal Reserve will be funding these new $800 billion programs with newly created reserves; which means, that they will print money.  This allows leverage to work.  Since the Federal Reserve is acting as a bank, it will only need $80 billion in capital to fund the $800 billion in new obligations.  Leverage was the culprit behind most financial institution failures, and now the government is using leverage to pull us out of financial crisis. 

I am concerned about the obligations they Federal Reserve is taking on.  The Federal Reserve has expanded its balance sheet in 2008 from $900 billion to $2.2 trillion in August, to $3 trillion, with the new programs.  Still, the Treasury needs to issue bonds to pay for the TARP program, at least $350 billion, and in future, the Federal Reserve will have to pay its new obligations.  Meaning, bond issues will be huge, potentially $1 trillion or more.  The US government and the European governments are now dominating capital markets. 

Also, money market rates have withered to nothing and long bond rates, like the 10 year Treasury are down 1% or more.  Inflation for 2009 will be negative.  But inflation beyond 2010 will be horrific.  Every time the Federal Reserve lowers Fed Funds below the rate of inflation, they increase inflation in the future.  And all of the new lending by the Federal Reserve is inflationary.  For bond investors, it means they have increased credit risk due to deteriorating cash flows at most companies, and that long bond rates will likely increase, causing losses for new bond investments.  I also believe that long-term holders of bonds are not being compensated for inflation. 

Conclusion

I am buying large-cap, US companies that have become good values from the overall decline in the US equity markets, along with growth companies that have suffered P/E compression of 50% or more.  I am holding a lot of cash, as I am less interested in bond markets due to credit risk, interest rate risk, and inflation risks.   As for bonds, I am only buying short, 1-5 year Treasuries. 

Once Europe & Asian central banks are done cutting rates, I expect the USD to fall, and then it will be time to buy commodities again.  I am selectively buying oil companies. I expect commodities to reflect real inflation, thus commodities such as oil, gold, silver, & grains should increase significantly in the near future.  Commodities & equities will be needed to fight inflation, and preserve the value of your portfolio. 

We have not bottomed yet.  I believe that we will retest the old S & P 500 low of 752 set 10 days ago.  Financials, technology, & consumer discretionary stocks are very weak, so it is unlikely we are starting a bull market anytime soon. 

Recent News 11.24.2008

President elect Obama was expected to name Tim Geithner as his Treasury Secretary Friday, which led to broad market rallies on Friday, after the S & P 500 had given up nearly 14% last week.  Hillary Clinton is expected to be named Secretary of State. 

President Bush urged Congress to approve $25 billion in loans for the auto industry from the TARP financial institution bailout funds.  FDIC head Sheila Blair wants to use $24 billion of TARP funds to stem foreclosures.  Treasury Secretary Paulson and Fed Chairman Bernanke oppose her plan. 

Goldman Sachs expects US GDP to fall at a 5% rate for Q4 2008, and for unemployment to reach 9% in Q4 2009.  New jobless claims hit a 16 year high of 545,000 while claims hit 4 million for the first time since 1982. 

As for companies, Citibank shares hit a 16 year low at 3.03 intraday Friday, and closed at $3.77.  Investors worried about future losses from their consumer loan portfolio, including credit cards and auto loans.  As of today, Citibank received an additional $20 billion in funding from the TARP funds, and shares rose to close today at $5.95.  Citibank had fallen 60% last week, and JP Morgan had fallen 34% last week. 

Wal-Mart named Mike Duke, the head of their international division, to CEO.  Heinz & Microsoft announce earnings that beat expectations.  Honda Motor announced cuts in production in Europe and Japan, cutting production by 61,000 vehicles.  HP & Dell both announced earnings that beat forecasts.  Boeing warned of possible layoffs. 

Markets

The 10 year Treasury yield fell last week to a 50 year low, to 3.03%, from a flight to quality, as investors sold stocks and bought bonds.  By the end of the week, the 10 year Treasury yield was up 16 ticks to 3.19%.  Stocks were hitting 5 years lows, as the Dow Jones Industrials, S & P 500, & NYSE Composite hit new lows on Thursday.  Friday the markets rallied on the expected announcement of Obama’s Treasury Secretary. 

YTD the S & P 500 is down 45.5%.  Before Friday’s rally, the S & P 500 was down 51% for the year.  Gold prices rallied to close above $800 on Friday, and crude oil closed below $50.  Gas prices are now below $2 nationwide. 

Top sectors are still consumer staples (food retail, pharmacies) along with utilities & medical/healthcare.  All are defensive, which means investors are shunning risk and seeking safety.  Technology, Financials, & Consumer Discretionary (autos, homes, high end retail) are all still bottoming; they will lead the new bull market when that starts; they still need to hit bottom, and become the leading sectors.  That will take some time. 

Lagging sectors are energy, industrials, and materials.  Mining stocks and energy companies are among the most depressed stocks in the market right now.  Industries that are down the most right now are biotech and food retail. 

Comments on the worldwide recession

Russia is having problems defending the rouble.  Citizens are exchanging roubles for USD.  Russian has borrowed heavily in USD, more than the $475 billion in currency reserves.  Their liabilities are increasing and their assets have depreciated.  It is likely that the rouble will have to be de-valued.

Corporations worldwide are looking for ways to conserve cash during the worldwide recession.  Companies are reducing inventories, cutting dividends, jobs, stock buyback plans, and drawing down lines of credit.  Many cannot raise additional money in debt or equity markets, or receive bank financing.  Those that have bank financing are negotiating to lengthen re-payment terms. 

Asian investors are angry over the US Treasury allowing Lehman Brothers to fail.  11,000 Singapore residents lost $347 million, 43,700 Hong Kong residents lost $2.6 billion, & 51,000 Taiwanese lost $1.2 billion, all as the result of investing in securities backed by Lehman.  These investors are elderly & retired.  It is expected that lawsuits will be filed, and in spite of disclosure of risk, courts will determine if these securities were suitable for retirees. 

It will be interesting to see when the US government exits the banking business.  In Europe, nationalized banks are political and misallocate capital. 

Conclusion

Until financials, technology, & consumer discretionary stocks lead, we are not in a bull market.  I see that equity markets are now bottoming, but that will take awhile, and we will likely see new lows before year end, and we will retest those old lows in the first quarter of 2009.  Other than selective buying of US, large-cap, blue-chip stocks, I am buying short-term, 1-5 year Treasuries.  Commodities are being held artificially low by the strength of the USD, which in 3-6 months, will start to weaken again; and that will start a new commodities boom.  I want to buy energy & mining stocks now as I find them to be good values.  The other side of this worse than average bear market is a bull market with more upside than the last one. 

Recent News 11.10.2008

The jobless rate increased for October to 6.5%, with 240,000 jobs being lost in the month, and September’s job losses were revised upward from 156,000 to 284,000. This was the worst two-month slide since 2001, and the highest jobless rate since early 1991. A poll of economists’ forecasts suggests a jobless rate between 8% and 10% for this recession.

President-elect Obama is requesting Congress to pass an additional $150 billion fiscal stimulus package before he takes office.

As for companies, GM & Ford are requesting government aid to survive. Both say they will run out of cash in 2009 without additional funding. E-trade sought an $800 million loan from the Treasury bailout plan; the company now trades at $1.71 per share. Walt Disney and News Corporation both offered dour views on future profits. (Investor’s Business Daily, November 10, 2008)

The Markets

The 10 year Treasury note is now 3.79%. Bond markets still fear the effects of increased money supply from the bailout plan, and new government bonds being issued to pay for the bailout plan.

Last week the Bank of England cut its benchmark interest rate by 1.5%, and the European Central Bank cut its key rate by ½ of one percent. Both plan more rate cuts. Europe’s big four economies are contracting about 1% per year. Australia, Switzerland, and South Korean central banks also cut rates last week.

Despite an election-day rally, the S & P 500 fell 3.9% for the week. Retailers, steel, and hotels & motels fared the worst last week, while medical stocks & insurance companies gained. Insurance companies gained in part because now they can access funds from the Treasury bailout plan. Although last Friday was a positive day for the equity markets, volume fell 24% from the prior day on the NASDAQ Composite, and was down 18% on the NYSE Composite. Occasional market increases on low volume are still not encouraging signs for a recovery of equity values.

YTD, the S & P 500 is down 36.6%. International markets have fared worse. The Morgan Stanley International Developed Markets index is down 38.1% YTD, and their Emerging Markets (international) index is down 51.8%. China’s A & B indexes are down 64.2% and 74.7% in USD terms.

The markets’ leading sectors have not changed: medical/healthcare, consumer staples, and utilities are leading, while lagging sectors are energy, materials, financials, consumer discretionary, technology, and industrials. The three defensive sectors are still outperforming the other industries, meaning that investors are shunning risk.

Commodities have experienced downward price adjustments based in large part on the recent relative strength of the USD. For example, crude oil fell $6.77 for the week, and closed at $61.04. (All Investors Business Daily, 11.10.2008)

Comments

There is still an expectation that the market will bottom sometime in the next six months. The low reached in the prior bear market (2000-2002) represented a fall of 50% from the prior high of the S & P 500 index, from 1550 to 775. A repeat of that technology-bubble correction for the current real estate/financial bubble would suggest we will adjust from the 2007 index high of 1576 to about 788 (the S & P 500 index closed last week at around 931, and through Wednesday 11/12 has slipped further to 852). Although we could see “mini-rallies” prior to reaching the ultimate bottom of this bear market, I believe the trend will continue downward before we see a real market recovery.

Last week the Federal Reserve lowered the Federal Funds rate to 1%. They plan to lower rates again in November. US GDP was down .3% in 3rd quarter 08, revealing we are in a recession. Germany, Spain, Britain, and Italy all reported contracting economies for their 3rd quarter 2008 also. The Case/Shiller Real Estate Index of US home prices in 20 US cities was down 16.6% year over year, through August 2008.

As for companies, JP Morgan temporarily halted foreclosures as it renegotiates $70 billion in mortgages held by 400,000 customers. The bank estimates that it has already modified 250,000 mortgages worth $40 billion so far this year. GM still wants to merge with Chrysler, but wants $10 billion in funding from the US government. With 65% of the S & P 500 reporting, profits are on track to decline 11.7% for 3rd quarter 2008. (All Investor’s Business Daily, 11.3. 2008)

Markets

The 10-year Treasury note rose to 3.97%, as the bond market expects inflation from the Federal Reserve’s current intervention. The markets also expect a large bond issue to fund the bank bailout, so the bond market is pushing up rates to make up for future expected inflation.

The Euro had its worst week ever last week against the USD. It fell against the USD, Yen, and the Swiss Franc, on expectations that the European Central Bank (ECB) will lower rates this week. Since the large European economies are contracting, the ECB plans to cut rates to spur growth again in Europe.

YTD, the S & P 500 is down 34%, while the DJIA is down 29.7%, and Dow Transports are down 14.98%. The best recent performing sectors are Consumer Staples, which include food retail and pharmacies, and Medical/Healthcare, which include care providers, equipment, and pharmaceuticals. This tells us investors are still shunning risk, and looking for safety in defensive stocks.

Commodities had their worst month all year. Gold is down to $718 per ounce, lower than the start of this year at $835. Oil was $67.81 last Friday, and heading lower. Remember when oil hit $147 and we all expected $200 oil? (All Investor’s Business Daily, 11.3.2008)

Conclusions

Other than Tuesday through Friday of last week, the short, medium, and long-term trends of the major US equity indexes are all down. The recent market rallies rode through bad economic news on low volume, and that type of rally is rarely sustained. This means that the market could continue making new lows.

The last time we had a 1% Federal Funds rate, Alan Greenspan was the Federal Reserve Chairman. Cheap money was a major cause of the financial crisis this year; and cheap money was a contributor to the real estate, commodities, and housing bubbles.

Two retail indexes that I follow, the XRT and RTH, fell dramatically in October. XRT fell over 35%, and RTH fell 33%. Both indicate that retail has not hit bottom. I also look at 13-week and 34-week trend lines on the major averages. This indicator gave a sell signal in December 2007. It has not given a buy signal in all of 2008.

Bull markets begin when three sectors are leading the market: financials, consumer discretionary (high-end retail and homebuilding), and technology. Right now these are the weakest sectors in the market (meaning, they are the weakest sectors in relative performance compared to the S & P 500). The relative weakness in these sectors, combined with the market-leading defensive sectors (Consumer Staples and Medical/Healthcare), also suggest we have not reached a bottom in the US equities indexes.

Generally, five of nine sectors must be in rally for a bull market to begin; and right now we have only two (again, the market favorites, Consumer Staples, and Medical/Healthcare). So for now, I see many indicators telling me this is not the bottom, and we have not yet started a new bull market. We may get a 10% to 20% market bounce, but I would call this a bear market bounce, due to the current oversold condition, which is much different from starting a new bull market.

In 2000 to 2002, the S & P 500 hit a high of 1550, and a low of 775, down 50% from its high. In 2007, the S & P 500 hit a high of 1576, so if we get a 50% decline from that high, we pull back to 788 for the S & P 500. Keep in mind that this is probably a more severe recession than the mild one in 2000-2002. This recession is likely to have more job losses, less retail sales, and more cuts in industrial production. So, it is possible for the S & P 500 to reach 700 before we get a sustained rally.

Right now, other than selective investing in US large cap blue chip companies, I am buying short-term US Treasury bonds and retaining cash. I will echo what I said last week: It is time to hang on to what you have, avoid big risks, & get through the deleveraging process.

Consumers weighed in on the economic data last week.  The University of Michigan’s confidence gauge fell to 57.5 in mid-October, from a reading of 70.3 in September, the sharpest one month decline since 1952.  Also, Retail spending declined 1.2% in September 2008, the biggest drop in more than three years.  On a better note, core inflation stood at 2.5%, a sign that inflation pressures are declining. 

The August industrial production figures for the US were down 1.5% in August, the largest monthly decline in decades.  That means less goods were produced, a sign of a slowing economy, specifically, an economy in recession. 

The Treasury department has planned capital injections of $250 billion into US banks with 9 of the top US financial firms receiving $125 billion, and $125 billion to go into smaller banks next month.  The Treasury is also guaranteeing many bank debts and interbank loans.  That is helping money markets, where the LIBOR rate declined by 42 basis points, meaning that money is not being rationed, banks are now lending to each other, and that the market is buying into the US Treasury’s and Europe’s capital injections and bailout plans. 

As for companies, JP Morgan and Citibank will receive a total of $25 billion, Morgan Stanley will receive $10 billion, and Bank of America will receive $25 billion, of which $10 billion is earmarked for Merrill Lynch.  (All from Investor’s Business Daily. October 20^th, 2008 page 1)

The Markets

The 10 year Treasury note is at 3.93%, up from 3.43% on October 6^th.  It reflects the likelihood that the US Treasury will issue long bonds to pay for the bailout plan, and rates will have to go up to be able to place the bonds.  Long bonds could suffer from higher interest rates and lower bond prices.  (Investor’s Business daily, October 20^th, 2008 page 1)

YTD, the S & P 500 is down 35.9%, the NYSE Composite is down 38.9%, NASDAQ Composite is down 38.9%, and the DJIA is down 33.27%.  (Investor’s Business Daily, October 20^th, 2008 page B8)

Among international indexes, China’s two indexes (A & B) are down 62.1% and 71.6% respectively.  The Morgan Stanley Developed markets index is down 40.2%, while their Emerging Markets index is down 50%.  (Economist October 18^th to October 24^th, 2008 page 112)

The best performing sectors in the past 65 days are Consumer Staples, up 16.62%, and Health Care, up 8.1%.  The worst performing sectors have been Energy, down 14.67, Materials, down 9.2%, and Industrials, down 5.54%, all in the past 65 days.  Only two sectors (of nine) are in rally, meaning, that most stocks are down, and that this is not a broad based rally. (from Stockcharts.com)

Interesting facts

Dividend rates are higher than short term money rates, a rare occurrence in the last 50 years.  (Economist October 18^th to October 24^th, page 86)

The DJIA is now trading below 9000, a level it hit in 1997.  That means investors who bought stocks more than a decade ago have no capital gains to show for it, only dividends.  (Economist, October 18^th to October 24^th, page 86)

25% of US homeowners have no equity or negative equity in their homes.  (Economist October 18^th to October 24^th, page 85)

Conclusion

It looks like the markets are attempting to bottom.  Consumer Discretionary stocks are starting to go higher, which normally only go up in bull markets.  However, bull markets have not historically started when credit is contracting.  This is the first time we have a worldwide recession, a banking crisis, and deleveraging all going on at the same time.  Right now, I am keeping equities to 20% or less, and buying short term Treasuries.    

After the S & P 500 fell 18%, its worst week in its history, (worse than the first week of the Great Depression of 1929, or the week of the 9/11 terrorist attacks), the G7 finance ministers met over the weekend and announced a coordinated response to the world banking crisis.  Europe has pushed for capital injections, and now the US Treasury plans to inject capital into healthy banks in the form of preferred stock.  Coordination was necessary to avoid the scenario with deposit insurance, where countries competed to offer the best guarantee.  Most critical is the restoration of money markets, where banks and corporations lend to each other to meet short term liquidity needs.  Currently, the Federal Reserve has lent $400 billion to US banks to meet liquidity needs.  The US equity markets expressed its approval today (Monday 10.13.2008) with a strong rebound of 11.5% in the S & P 500. 

Last week, US equity markets were tired of the piecemeal approach, as the bailout plan addressed bad assets but not new capital, which is a more critical need.  Also, The Federal Reserve had lowered both the discount rate and Fed funds rate, and promised large corporations they would buy their commercial paper, but the markets responded with a strong decline, meaning, “we don’t believe this will work.”   Without functioning money markets, there is no floor or bottom to this market, other than a willing buyer wanting to buy. 

The US Treasury selected its asset managers and now plans to buy troubled assets in four to six weeks.  So it is moving forward quickly to implement the plan. 

The IMF expects the US to be in recession for the 3^rd and 4^th quarters of 2008, and the 1^st quarter of 2009.   The big economies of Europe are in recession or going into recession: that includes Germany, U.K., France, and Italy.  Of the G-7 nations, the wealthiest of the world, Canada is expected to have the best GDP growth, of 1.2% in 2009. 

As for companies, Lehman’s Credit Default Swaps were sold for 8.675 cents to the dollar, meaning that the banks who guaranteed their estimated debt of $270 billion will have to pay 91 cents on the dollar, or $246 billion.  Ouch.  Those banks are expected to request help from the US Treasury.  GM hit a 58 year low last week, to $4.86 per share, while Ford closed at $1.99.  Both were on watch by S & P for credit downgrades.  GM was considering a merger with Chrysler.  The auto industry is expected to shed 100,000 jobs this year.  (Investor’s Business Daily October 13, 2008)

The Markets

The 10 year Treasury note rose to 3.88%.  The bond markets are expecting significant new issues of Treasury bills and notes.  It will likely require a higher yield to place $350 billion of new bill & bonds to fund the bailout plan.  The USD has been strengthening against all currencies except the yen.  The yen’s strength is due to buying by hedge funds that had shorted the yen, to borrow yen and buy higher yielding assets elsewhere.  This has resulted in strong demand for the yen.  (IBD)

YTD, the S & P 500 (as of Friday) was down 38.8%, the NYSE Comp was down 41.4%, the Nasdaq Composite was down 37.8%, and the DJIA was down 36.29%. 

The best performing sectors right now are Consumer Staples, up 15.68%, Consumer Discretionary, up 10.36%, and Financials, up 8.36%.  The worst performing sectors are energy, down 19.32%, Utilities, down 8.32%, and Materials, down 7.02%, all in the last 65 trading days.  The worst performing industries so far this year are brokers, down 57%, oil service, down 53%, and gold, down 41%, all in the last 65 trading days.  So the market is still is a defensive mindset, shunning risk.  (Stockcharts.com)

Among international markets, Emerging markets fell harder than Developed markets. The MSCI Emerging index was down 22.9% for the week, and 51.4% for the year, while the MSCI Developed index was down 15.2% for the week, and 36.8% for the year.  Of major stock indexes, some of the worst performance for the year is Brazil, down 56% in USD, Russian, down 67% (in USD), and China’s A & B indexes, down 57% and 67%, in USD terms.  (Economist)

The VIX (Volatility index) hit an all time high of 75.  Rarely does this index go over 45.  47 is a typical reading for a new bull market.  This time, the VIX was reflecting the instability in the money markets, and desire by the market for a comprehensive solution to the current financial crisis.  (Stockcharts.com)

Commodities had a tough week.  The CRB index, a basket of commodities, was down 11.2% for the week.  Oil was down over 10%, to close at $77.99 on Friday.  Grains, oils, fuel, all fell hard on the strength of the USD.  And strength in the USD was largely based on foreign weakness, and the USD’s status as the # 1 reserve currency.  (IBD)

Implications of the Bailout

Although politicians in Washington like to blame greedy Wall Street (and they were greedy), they have forgotten that they are the referees: like in a football game, if they don’t like the way the game is played, they can throw a flag, and govern the players. It is just easier to blame someone else. 

Another cause was cheap money: Alan Greenspan in his term as Federal Reserve governor, reduced Federal funds rates to 1%; so money became too cheap.  That helped create the bubble in real estate prices.  And, emerging markets and oil exporting nations had excess capital that flowed to the US.  This money had to be put to work somewhere. 

Then there was a shadow banking system, where banks did loans without reserving for losses.  Regulators did not have the rules to deal with the financial innovation, as mortgage back securities had evolved into quite sophisticated instruments, with several tranches of loans with varying credit quality. 

Until today, there was little hope the bailout plan would work.  It addressed bad assets, but did not resolve the liquidity crisis for banks short term funding, nor the lack of interbank lending.  It looked like the US Treasury was going to have to guarantee interbank lending, after it injected capital.  What still needs to be addressed, is dealing with homeowners struggling to pay their mortgages, and small businesses need for capital.  Since small businesses employ 84% of the US workforce, lack of capital results in job losses. 

This is very positive that the markets now believe the plan will work, and the US equity markets and world equity markets rebound today reflects confidence in the plan.

The IMF estimates that US & European banks need to de-leverage $10 trillion worth of loans on their books.  They estimate that there will be $1.4 trillion of losses from $1.3 trillion of sub-prime loans, of which only $600 billion has been recorded by financial institutions, meaning $800 billion still needs to be booked.  The US Treasury and Federal Reserve may be absorbing some of those losses.  Also, the IMF estimates European banks need $400 billion of new equity, and US banks need between $200 and $300 billion.  I am encouraged that the revised bailout plan includes capital injections to make sure banks are healthy.  The Deleveraging effect will take 1.5% off US GDP growth in the next 12 months.  (Economist)

As for investors, capital will continue to be constrained.  Europe and Asia need to continue cutting rates, so their currencies, and most of their markets will fall, as the global economy continues to slow.  So I have dramatically reduced international positions.  Also, since small & mid size companies struggle in a tight money environment, I am focusing equity investments on large capitalization, mature businesses, with consistent cash flow.  In the bond markets, I am avoiding Mortgage backs bonds, High Yield, minimizing Municipals due to a possible 20% reduction in tax revenues from depressed real estate prices. 

In the bond market, that leaves Investment Quality bonds, and Treasury, short duration bonds, with a maturity of 1-5 years.  Since the US, France, Germany, UK, Italy will all be issuing bonds to stabilize the world financial system, I expect interest rates to move up in the 10 year and up category, which means lower prices and losses for long-term bond investors.  So I don’t like the interest rate risk in long bonds.  I have been buying quality blue-chip stocks for long term investors. 

October is a volatile month.  Most likely the equity markets will end higher.  According to the Stock Trader’s Almanac, the best months to be in the market are November to January.  The only exception here is that hedge funds and brokers are selling trillions of dollars of positions to reduce their leverage, so I see downward pressure on the market for the next several months.  I am hoping for the best but staying defensive.  Food companies, big integrate oil, and the like seem like safe places to hang out for now. 

* Registered Principal and Financial Advisor of Park Avenue Securities LLC PAS. 

Securities products/services and advisory services offered through PAS a registered

broker-dealer and investment advisor. Field Representative, The Guardian Life Insurance

Company of America (Guardian) New York, NY. PAS is an indirect wholly owned subsidiary

of Guardian. Wealth Design Group is not an affiliate or subsidiary of PAS or Guardian.

* PAS is a member FINRA, SIPC.  Securities offered through Park Avenue Securities, LLC, Member FINRA/SIPC.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. 

* The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.

*Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

*Investor’s Business Daily is the source for Recent News

* Stockcharts.com & Economist are the source of technical information on the market and international market indexes.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. 

* Consult your financial professional before making any investment decision. 

* You cannot invest directly in an index.

* Past performance does not guarantee future results. mc101507

MC101507

* Links to other sites are for your convenience in locating related information and services.  This Agency, The Guardian Life Insurance Company of America (Guardian) and Park Avenue Securities, LLC (PAS) do not maintain these other sites and have no control over the organizations that maintain the sites or the information, products or services these organizations provide.  Although this Agency, Guardian and PAS believe that the information from these organizations is reliable, we cannot guarantee its completeness or suitability for any purpose. Accordingly, this Agency, Guardian and PAS expressly disclaim any responsibility for the content, the accuracy of the information or the quality of products or services provided by the organizations that maintain these sites.  This Agency, Guardian and PAS do not recommend or endorse these organizations or their products or services in any way.

Over the past five years, exchange-traded funds (ETFs) have grown from a small niche of the investment market into an important new way to invest. According to the Investment Company Institute, investors can choose among more than 400 ETFs, and the ETF industry accounts for more than $400 billion in assets. Many investors are attracted to the basic benefits of ETFs, which include low costs and access to new asset classes. However, some confusion also exists in regard to how ETFs work and how to include them in diversified portfolios. This article will clear up misconceptions about ETFs, including the idea that ETFs are just a new type of index fund.

Let’s start with a basic definition: An ETF is a fund that offers diversification among a basket of securities (like a mutual fund) yet it trades on an exchange (like a stock). ETFs can be bought and sold at any time during the trading day through most brokerage firms, and each trade costs a brokerage commission. In addition, ETFs charge management fees (like mutual funds), but these fees typically are akin to those charged by index mutual funds – not the higher fees charged by actively managed stock funds. When ETFs are traded frequently, brokerage commissions can mount up quickly. However, when they are bought and held long-term, they can be economical ways to invest in diversified baskets.

Access to More Asset Classes

One advantage of ETFs is that they can track indexes or baskets that open access to new asset classes, such as gold. Other asset classes that could be added to portfolios through ETFs include “country-specific” international emerging markets (e.g., China and India), U.S. economic sectors, commodities, currencies, real estate, energy and alternative energy, private equity, and high-dividend stocks.

Benefits of ETFs

One important benefit that ETFs can achieve, compared to mutual funds, is a reduction in the tax impact caused by capital gains distributions. Mutual fund investors (who hold shares outside retirement plans) are accustomed to receiving an annual taxable distribution in November or December of each year, even if they sell no shares. The tax on capital gains distributions effectively reduces a mutual fund’s after-tax return. Most ETFs have been able to avoid capital gain distributions because of the way they are structured.

Other advantages of ETFs include:

·        Trading liquidity – Unlike most mutual funds, which are valued once per day, ETFs are valued throughout the trading day. Trades may be placed and executed at any time during the day. ETFs are bought and sold using the same types of orders that investors use for stocks, including limit buy orders.

·        Transparency – Most stock exchanges quote both an ETF’s trading price and the indicative value of the index or basket that it tracks. Since ETFs can be redeemed by large institutions in exchange for the index/basket, the spread between trading price and indicative value usually is low. Over time, ETFs tend to track their indexes about as well as index mutual funds.

·        Diversification – ETFs can be bought in almost any quantity – from large amounts down to a few shares at a time. It is possible for an individual with a modest-sized portfolio to diversify among several ETFs.

·        Margin and short sales – Like stocks, ETFs can be bought on margin or sold short. This makes ETFs attractive in strategies designed to hedge against a market downturn or lock in the value of concentrated stock holdings.

·        Convenience and accessibility – All ETFs are held by a brokerage firm and this makes it easy to buy, sell or transfer shares. Also, just about any ETF can be accessed by anyone with a brokerage account.

Several innovations are expected to make ETFs even more interesting investment options in the future. For example, one type of ETF automatically rebalances a stock portfolio periodically based on quantitative analysis of a stock universe. This creates a passively managed index fund that has the potential to outperform stock market averages, if the quantitative data is accurate in forecasting trends. Actively managed ETFs with a human portfolio manager (similar to most mutual funds) also are expected to gain traction in the years ahead.

The ETF revolution has only just started. As the number of ETF choices and more innovative concepts emerge, it is sure to gain even more momentum in the years ahead.

Not long ago, “retirement” for many people meant living on a combination of Social Security and a fixed pension. Today, retired people are living longer and better, and they also are making more personal choices. Most retired people want to “live it up” in their golden years, not watch life pass them by. That puts even more of a burden on the pre-retirement planning process.

Retirement Is Not Predictable

In today’s world, many people slip into retirement gradually in a transition period that occurs over months or years. In some cases, this period begins at an unexpected time, such as when an employer announces layoffs. Few people can predict with certainty which day will be their last on the job, while many people want to keep working (at least part-time) well into the retirement transition.

In the absence of predictable retirement dates, many people put off the serious planning that should take place before retirement. Instead of anticipating changes in their lifestyles or financial circumstances, they wait until too late and then react. This can lead to poor decisions made under pressure, and an unproductive start to their golden years. As a rule of thumb, it’s a good idea to start serious retirement planning at least one year before the transition period begins. This allows adequate time to obtain professional help, understand the many choices available, and make important decisions.

Key Issues and Decisions

What issues and decisions should you evaluate in this pre-retirement planning process? The following are often important:

·         Investment asset allocation – Retirement is a good time to assess how much risk you want to take with your investments. Once you stop working full-time, it may be harder to replace assets lost if markets turn down. Also, you may have less time available to recover from a loss. An asset allocation process guided by a qualified financial professional can help to develop an overall investment framework that aims at a specific level of risk, with adequate diversification among asset classes.

·         Income from investments – Many retiring people expect that investment income will replace part of their paychecks. Since few stocks pay dividends above about
3-4%, that can mean repositioning assets from the stock market into bonds or cash. Fixed annuities provide guaranteed monthly income payments that can help to fill budget gaps when paychecks stop. In some cases, retired people find that income can be obtained for special needs by borrowing against the accumulated cash values of their life insurance policies. A pre-retirement review can identify the level of income needed and the best sources of investment income.

·         Social Security benefits – The decision of when to begin Social Security retirement benefits is important, and usually can’t be changed once made. Whether you apply for benefits as a worker or spouse, you currently can begin receiving benefits as early as age 62. However, permanent benefit reductions are imposed for each month that benefits are received prior to your Normal Retirement Age. As retirement nears, it’s a good idea to check the free Social Security Statement, which contains your earnings history and an estimate of benefits.

·         Health benefits – This can be a major issue for people who retire prior to age 65, when Medicare and Medigap coverage may begin. Many employers do not offer to extend group health coverage beyond the period required by law. Even then many retiring workers must dig into their pockets to pay premiums. At age 65, coverage under Medicare Part A (hospital) is automatic for most people, and most retired people also elect to pay the modest premium required for Medicare Part B, which covers doctor bills and miscellaneous medical charges. It’s also important to evaluate private Medigap policies, which cover Medicare co-payments and deductibles.

·         Retirement distributions – When workers retire, they can be offered the full balance of “vested” money in their company retirement plans. But before you accept a check for so much money, it is wise to have a clear idea of tax implications and investment choices available. One choice is to receive this money and roll it over to an IRA within 60 days. But even if you meet the rollover deadline, 20% of plan money goes to the federal government in withholding taxes. In many cases, it is better to have the plan directly transfer money into an IRA. Since you don’t handle the transfer, there is no federal tax withholding and 100% of your nest egg can grow tax-deferred.

·         Estate planning – It’s best to start planning for your estate as early as possible. In recent years, there have been many changes (and proposed changes) in estate tax laws. That makes this a good time to review any existing estate plans, and also to take care of details such as writing a will or creating trusts. Park Avenue Securities (PAS) and The Guardian Life Insurance Company and the representative do not provide legal or tax advice or services.

If you reach a point at which you feel pressured to make major decisions without adequate planning, you’ve waited too long. So, obtain the information and guidance you need to calmly consider all your choices. Competent financial professionals will offer illustrations that can help you chart a course through retirement, while projecting the levels of income and assets you need to maintain your lifestyle. In pre-retirement planning, you will make some of the most important financial decisions of your lifetime. Don’t make them in haste or alone.

As Americans keep living longer, they are being challenged to find income sources that can be counted on for as long as a person lives. Social Security currently promises such an income, as do many pension plans. To supplement these sources, individuals can purchase immediate annuities from insurance companies.

Immediate annuities help to manage the longevity dilemma by transferring risk to a life insurance company. These annuities can be acquired with a one-time (lump-sum) payment or by “annuitizing” a tax-deferred annuity. The transaction converts assets into a stream of income payments, and the buyer may be faced with giving up rights to principal.

Immediate annuities offer these benefits:

·         This market is very competitive. With the help of a financial advisor, a buyer can compare quotes from several quality insurance companies.

·         Buyers can choose an income payout frequency such as monthly, quarterly or annually.

·         Payouts can be selected that will last over one lifetime, two lifetimes, or a specific period of time.

·         Once a payout frequency and method are chosen, the amount of guaranteed income usually stays predictable and level.

A One-Time Choice

Two questions often arise when retired people evaluate immediate annuities:

1.      What if I make this choice and then want to change my mind?

2.      Aren’t these fixed payments vulnerable to inflation, and won’t my purchasing power gradually be reduced over time?

The answer to the first question is that this usually is a one-time decision and the consequences are permanent. That’s why it’s such an important decision that should only be made after carefully reviewing personal goals with a qualified advisor.

The answer to the second question shouldn’t affect the decision as to whether to purchase these annuities, but it can affect how much of a retirement nest-egg is put toward this goal and which type of payout is taken. In some annuities, it is possible to choose payments that increase by a fixed percentage each year (e.g., 3% per year) to keep help keep pace with inflation.

Taxes on Annuity Payouts

An annuity purchased outside of a retirement plan is called “non-qualified.” One advantage of annuities is the favorable tax treatment that they receive from the IRS compared to other sources of retirement income. For example, if you receive $4,000 from an immediate annuity, only a portion of payments are taxable. The rest is considered a non-taxable return of principal. For more information on the reporting or taxation on non-qualified annuity payments, refer to IRS Publication 590.

Qualified and Variable Immediate Annuities

A qualified immediate annuity uses money inside a retirement plan, including personal IRAs, to purchase guaranteed income. If this type of annuity is purchased before age 70 ½, IRS minimum distribution requirements normally will be met on this money, provided the payments continue over a period not greater than life expectancy.

All payments made from qualified immediate annuities are usually fully taxable, except for any portion representing after-tax contributions. Event if a workplace retirement plan does not offer an annuity payout, the money usually can be transferred or rolled over to a Traditional IRA that allows annuitization.

A variable immediate annuity offers a stream of payments that are guaranteed as to the time period (or number of payments), not as to the amounts to be paid out. The amount of payments will rise or fall with the performance of underlying investment portfolios linked to the account.

In summary, immediate annuity purchases often are one-time decisions that involve a variety of comparisons and choices in regard to competitive rates, payout methods, and other factors. It’s very important for retired people who are interested in these solutions to shop carefully with the benefit of qualified professional help. Making a good choice can continue to provide guaranteed income and peace-of-mind for a lifetime. The taxation is similar to that of other annuities, with a portion of each payment considered a tax-free return of the principal you originally paid.

In the coming years, one of the most important debates in America will be over health care in general and specifically whether a “universal health care” system is politically and economically feasible. Until that debate is resolved, the U.S. will maintain a medical insurance system with many moving parts. Choosing personal or family medical protection begins with an understanding of what the parts are, who pays for them, and how they fit together, as described in this brief guide.

Some critics of universal health care argue that it will turn into “socialized Medicine” – which generally means having medical insurance provided by the government, not private plans. However, a growing part of U.S. medical care already is paid for by government-sponsored plans – including Medicare and Medicaid – and proposals are being implemented or considered in several states to expand government involvement in medical expense reimbursement. Therefore, we’ve divided the “moving parts” that follow into two sections: private insurance and government programs.

Private Insurance

·        Fee for service – For many years, these medical plans were the gold standard for private health insurance. But because they are the most expensive plans to purchase, they have been steadily declining in popularity. A fee-for-service plan allows the insured person to choose among many health care providers, and it reimburses costs whether or not they have been negotiated by the insurance company. Typically, most approved costs are reimbursed after an annual deductible has been satisfied.

·        Health Maintenance Organization (HMO) – An HMO offers access to a network of health care providers including hospitals, doctors, clinics and specialists. It negotiates the charges that will be reimbursed to network members and thus uses the bargaining power of a group to reduce costs. HMOs usually pay most of the cost for using in-network providers, except for a co-pay.

·        Preferred Provider Organization – A PPO is a cross between a fee-for-service plan and an HMO. It offers a provider network, similar to HMOs, while also allowing an insured individual to go “out-of-network” to access other providers or services. The co-pay or deductible usually is lower for in-network providers than for those outside.

·        Consumer-driven Health Care (CDHC) – This concept seeks to put more spending decisions in the hands of consumers by reducing medical insurance costs with higher deductibles. The idea is that when consumers spend their own dollars on health care (up to an annual deductible limit), they will shop more carefully and spend less. Health Savings Accounts (HSAs) are linked with high-deductible health insurance programs, enabling consumers to spend pre-tax dollars to meet the annual deductible.

·        Medigap – This insurance is purchased by people over 65 to fill in deductibles and other gaps in Medicare coverage. While this coverage is supplied by private companies (not the government), it is heavily regulated. Consumers must choose from 10 standard policy types, and coverage may not overlap Medicare-provided benefits.

·        State Children’s Health Insurance Program (SCHIP) – This program is partially funded by the federal government through private plans designed and administered by the states. It aims to support private health insurance coverage for children, especially in low income households. In many states, SCHIP enables children to obtain private medical insurance at a fraction of the cost that adults pay.

Government Programs

·        Medicare – Medicare is comprehensive health insurance that covers most Americans age 65 and older. Currently, Medicare has more than 40 million participants, most of whom pay only a monthly “Part B” premium that covers doctor’s bills. Part A, which covers hospital bills, is free to eligible seniors with 40 or more covered quarters. Both parts of Medicare also contain a variety of co-pays and deductibles, but much of their costs can be covered by purchasing private Medigap” coverage.

·        Medicaid – Medicaid is the socialized U.S. health insurance system of last resort for the poor and elderly indigent in the U.S. Jointly administered by federal and state governments, it pays costs: 1) for people under 65 who can’t afford private health insurance; 2) for low-income people over 65 who don’t qualify for Medicare; and 3) for the poorest people confined to nursing homes.

·        Public Employee Plans – Critics of socialized medicine in the U.S. often ignore the fact that the public already pays a large part of the cost of health insurance for public employees in federal, state and local governments. For example, the Federal Employees Health Benefits Program (FEHB) covers about eight million federal employees (including members of Congress) and their dependents with benefits that are more comprehensive, and cost less to the employee, than most private plans.

As the U.S. seeks to reduce the huge number of uninsured individuals, and as the costs of all types of health insurance keep rising, health care reform will be an important political issue for years. Although it is probable that many of the insurance funding solutions described above will keep working in the future, new concepts in health insurance are already on the horizon. Consumers should “stay tuned” for even more changes ahead.