July 15, 2011 THIRD QUARTER COMMENTS
LIKE A HURRICANE
From mid-February to mid-June, the Dow 30 swung within a 1300 point
trading range, yet made zero net progress. For the second quarter, the
Dow was the only index to finish with a gain, being up 0.8%.
The last week of the quarter saw the strongest gains in the market in two years. NASDAQ was up 6.2% for the week, the Dow increased 5.4%, its best performance since July 2009, and the S & P 500 rallied for five straight days, recording its best weekly gain since March 2009.
Year to date, the Dow is up 7.2%, the S & P up +5%, and NASDAQ up +4.8%.
EVERYONE KNOWS THIS IS NOWHERE
We remain in a deflationary credit mode, two years after the recession officially ended. Households and corporations are saving more and spending less. Corporate balance sheet liquidity has been rebuilt and cash is building across the private sector. Banks have shrunk their balance sheets as loans outstanding loans have retrenched and without growth in bank balance sheets; there is no money supply growth.
Personal incomes are not growing. Most retailers are not reporting sales gains. Home prices are down 33% from the peak, and gas is up 52% in two years. The 30-year Treasury bond has been declining since December and higher commodity prices or taxes will intensify deflationary pressures elsewhere in the economy.
The federal government added 418,000 new jobs since the recession BEGAN.
The private sector lost 4,000,000 since it ENDED. Total jobs in the US
are down 6,900,000 from the peak set in 2007. There are eight unemployed
people for each job opening and 20% of households have at least one person
looking for full time work.
THE DEEPER YOU GO, THE HIGHER YOU FLY…
The strongest stock market period in the presidential election cycle is from the low before the mid-term election, to the high after the election. This usually happens during the 3rd year of a presidential cycle and over the past five mid-term elections, during this period, the S & P 500 has averaged a 41% gain.
When combining the fourth quarter and the first quarter of the year following the past five mid-term elections, this has been the strongest period for stocks and has averaged a +7.9% compounded gain. In comparison, the average performance during the second and third quarters of these years was - 6.4%.
2011 is a pre- election year, which are usually positive for stocks as the administration tries to fire up the economy so voters will be feeling good at election time. In three of the past four pre-election years, the Dow Jones Industrial Average posted 20% plus gains, and while some fiscal sanity would help make that target a reality, the way our legislators spend our money, it won’t come easy.
WORLD ON A STRING
Greece owes $240 billion to European Union banks and governments, Portugal owes $290 billion, Ireland $870 billion, Spain $1.2 trillion & Italy $1.4 trillion. Half of this debt is held by France and Germany and most certainly, any economic dislocations in Europe will impact US.
The IMF has given Greece $ 17 billion. The government must cut $40 billion. The Greek people face tax hikes for five years, and the self- employed will pay a flat tax, if they make money or not. Spending for education and health care is being slashed, along with social security, which will also be means tested. The retirement age becomes 65, salaries for public employee union members get cut 15% and there is more…
FDR wrote “collective bargaining cannot be transplanted into public service as the very nature and purposes of Government make it impossible for officials to bind the employer, who is the whole people who speak by means of laws enacted by their representatives”.
No one is representing the taxpayer when temporary politicians make promises to special interests, which cannot be kept because of economic realities. This is why governments with generous social welfare programs all over the world are being forced to restructure the way they do things.
Bailouts only buy time. True fiscal responsibility solves economic problems.
ROCKIN IN THE FREE WORLD
Free prices set by willing buyers and seller’s creates efficiencies in the marketplace that send signals on what to produce, when, where, and at what price. Bureaucrats can never set prices, allocate goods or decide what should be made as well as millions of people who act in their own interest through a free and open market.
Milton Friedman wrote “economic freedom was essential for political freedom” and “production under the auspices of government makes it nearly impossible for any dissent or the exchange of ideas.” When Chile abandoned socialism in 1973, they used a privatized pension system to create a capital market and serve as an investment pool. Today they are the wealthiest country in Latin America.
True government stimulus comes from low debt, low taxes, reduced regulation, spending restraint, and a free economy. When Big Brother is making the financial decisions for people, they will never know where money comes from or connect what they earn, and save, to what they can spend.
Outside of the NFL where outcomes are never predetermined, socialism has NEVER worked.
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