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Daniel J. Disimile, CFP
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January 15, 2011 FIRST QUARTER COMMENTS

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WELCOME TO 2011

 
 

WE ARE DEFINITELY NOT IN KANSAS ANY MORE…

2010 ended with the second consecutive year of double digit returns for the stock market.

Since 1950, there have been three periods when the S & P 500 had three consecutive years of double digit returns (1949-1951), (1950-1952), (1963-1965). Many may remember during the 1990’s when we had five consecutive years of double digit returns (1995 to 1999).

The Dow Jones Industrials finished 2010 up 11.02%, the Standard and Poor’s 500 rose 12.8% and the NASDAQ Composite was up 16.9%. The hope for change spurred stocks to gain 20% during the second half of the year, and finish at their highest levels since the 2008 Iowa caucus.

The third year of a presidential cycle is usually the strongest of the four years for the market.
In March, we enter the third year of an economic recovery, and since World War II, the third year of a recovery has translated into an average return of 10% for the stock market.

Since hoarding cash at zero percent interest rates is a poor capital allocation strategy, one should expect an increase in mergers and acquisitions. Activity for the sector last year totaled $2.25 trillion, a 20% increase over 2009 and the first increase year over year since 2007.

The economic news is positive, except for unemployment, which may be reduced thanks to a more enlightened economic policy. Confidence is rising, the yield curve is positive, bonds are being sold and funds returning to stocks by those who missed the rally. Free market solutions to healthcare, instead of overwhelming the government with entitlement demands, will help continue the advance without bankrupting the system and overthrowing our way of life.

Two weeks before the March 6, 2009 bottom, President Clinton encouraged President Obama to become more optimistic on the US economy. Two weeks after the bottom, on 60 Minutes, the President laughed when discussing the global economy, forcing the interviewer to ask if he was “Punch Drunk”. Perhaps he was just giddy over the birth of a new bull market.

FOLLOW THE YELLOW BRICK ROAD?

Gold is a commodity, a shiny metal, with limited industrial use. Its value in history has been based by civilizations holding a primitive attraction to the material, and hence, has earned the reputation as being “the currency of barbarians”.

The decline of the dollar, financial market instability, concerns of inflation by countries taking on massive debt, and the continual threats to world peace have been rewarding to gold investors, but past performance is no guarantee of future success. The economy is improving, the world did not end, the middle class was not wiped out, and private property is making a comeback.


IF WE ONLY HAD SOME BRAINS...

Social Security has historically run surpluses but last year, the program had a $41 billion deficit. Another deficit is expected this year and in 2015 and onward; Social Security is projected to pay out $7.9 trillion more in benefits than it will receive in tax receipts.

Promises made should be kept, but delivering on those promises should not be based upon an economic model known as a Ponzi scheme. Actuaries for the federal government project that the future costs of Social Security, Medicare and Medicaid will be $107 trillion.

According to the Cato Institute, pension plans covering nearly two thirds of local government employees face an unfunded liability of $574 billion, and the unfunded liability for state and local workers health care costs is $1.4 trillion.

The US Chamber of Commerce estimates unfunded liabilities due to all public sector unions is $3 trillion. According to the AFL-CIO and SEIU (Service Employees International Union) the amount is closer to $6.6 trillion.

In a growing economy, making commitments is easy when there is no accountability for the decision making and unlimited access to other people’s money. As Warren Buffett often says, “it is only when the tide goes out that we will learn who has been swimming naked.”

TRILLION$, OF DOLLAR$ OF DEBT, OH MY...

A trillion here, a trillion there, pretty soon it adds up to real money.
In 2008, the federal government collected $2.5 trillion in taxes. In 2009, it was $2.1 trillion.

In 2010, the federal government’s deficit was $1.4 trillion, and accounted for 10% of our GDP.
For every dollar we now spend, 42 cents is borrowed.

In 2010, federal spending was 26% of GDP, up from the long term average of 20.2%, which was experienced from 1960 until the recent financial crises. Our debt to GDP ratio is projected to grow to 92% by 2020.

Total public debt of the federal government is $13.9 trillion and projected to exceed $20 trillion by 2020. The last Congress created $3.2 trillion in new debt and the one before $2 trillion.

We currently spend $187 billion a year or 1.3% of GDP to pay the interest on our debt.
By 2020, that number is projected to be $1.1 trillion or 4.8% of GDP.

In 2008, state and local governments spent $2.2 trillion, of which half paid wages and benefits of state and local workers. In California today, almost 80 cents of every dollar collected is spent on the pay and benefits for government employees.


THERE’S NO PLACE LIKE HOME

Are Americans Getting Wealthier Again?

Total Household Net Worth

Total household wealth, defined as all the cash, stocks, money, real estate and long lasting goods owned, minus debts, fell sharply over the last three years. There was a 25.6% decline in the second quarter of 2007, to the first quarter of 2009, the biggest drop ever recorded since data began being kept.

Since bottoming, household wealth has rebounded 12% to $54.9 trillion. Economic recoveries are almost always accompanied by strong gains in net worth, driven by a rising stock market and housing prices.

OVER THE RAINBOW

The New Year, like previous ones, will bring crisis and opportunity, happiness and heart break, problems and solutions, gains and losses. Understanding the financial markets and helping those achieve their financial goals is something I have been doing professionally for 25 years.

As a certified financial planner, I have a fiduciary responsibility to help clients achieve financial goals. As a registered investment advisor, I can provide incredible investment products and services to my clients which I never dreamed was even possible.

My best wishes for a happy and prosperous 2011, and thank you for the interest and support.

 
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