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Market Commentary
Economic Updates
Recent News |
Weekly Commentary
May 17, 2010
The
Markets
"Hot
potato" is a favorite children's game. Unfortunately, as adults, we're
playing an economic version that has the potential for much more serious
consequences.
It
started with consumers going into debt over their heads to help fund an
ever-increasing lifestyle.
For
example, total household debt rose from $1.1 trillion in 1978 to $13.5 trillion
at the end of 2009, according to the Federal Reserve. That's more than a 12-fold increase over the past 31 years.
By contrast, our economy, as measured by gross domestic product, grew from $5.3
trillion to $13.3 trillion during that same period--a more modest 2.5-fold
increase, according to the Department of Commerce.
Then
it moved to the financial sector racking up huge liabilities on the back of
newfangled derivative securities.
Total
financial sector debt, which includes various government-related enterprises
and private financial institutions, rose from $0.4 trillion in 1978 to $15.6
trillion at the end of 2009, according to the Federal Reserve. That's a 39-fold increase over the past 31 years.
With this high leverage, is it any surprise that our banking system nearly went
kaput in 2008?
Then
it moved to the local, state, and federal governments incurring unsustainable
debt to keep the world economy from collapsing.
Total
U.S. local, state, and federal governmental debt rose by a factor of 11 from 1978 to 2009, according to the Federal Reserve. Overseas,
the picture looks bleak, too, as many of the European Union countries are
sitting on huge piles of IOUs that look increasingly less likely to be paid
back in full. Not surprisingly, gold prices hit a record high last week as
people turn to the perceived safety of the yellow metal in times of doubt,
according to the Financial Times.
With
the potato of debt having passed from party to party over the past three
decades, the financial markets are now saying the potato stops here. As John
Mauldin, president of Millennium Wave Advisors, LLC, says, "You don't cure
a debt problem with more debt unless you have a clear path to grow your way out
of the debt." In the U.S., we can grow through population growth and
productivity gains. That, coupled with higher taxes and lower spending, may do
the trick. In Europe, structural headwinds make the growth story much more
difficult and that's partly why the value of the euro is declining and street
protests are rising.
How
this unwinding of debt plays out with the world populace will likely affect the
financial markets for years to come.
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Data
as of 5/14/10
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1-Week
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Y-T-D
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1-Year
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3-Year
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5-Year
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10-Year
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Standard
& Poor's 500 (Domestic Stocks)
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2.2%
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1.9%
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28.6%
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-8.9%
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-0.5%
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-2.4%
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DJ
Global ex US (Foreign Stocks)
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2.6
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-6.4
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23.6
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-10.6
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3.0
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0.8
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10-year
Treasury Note (Yield Only)
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3.4
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N/A
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3.1
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4.7
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4.1
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6.5
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Gold (per
ounce)
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2.8
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12.0
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33.6
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22.6
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24.1
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16.2
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DJ-UBS
Commodity Index
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-0.6
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-8.1
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6.4
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-9.5
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-2.7
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2.2
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DJ
Equity All REIT TR Index
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3.7
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14.3
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70.5
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-9.0
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3.4
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11.2
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Notes:
S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude
reinvested dividends (gold does not pay a dividend) and the three-, five-, and
10-year returns are annualized; the DJ Equity All REIT TR Index does include
reinvested dividends and the three-, five-, and 10-year returns are annualized;
and the 10-year Treasury Note is simply the yield at the close of the day on
each of the historical time periods.
Sources:
Yahoo! Finance, Barron's, djindexes.com, London Bullion Market Association.
Past
performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable or not available.
WHAT IS ONE OF THE BEST
INVESTMENTS you
can ever make? No, we're not talking about the stock market, commodities, or
gold. Instead, we're talking about investing in your own education. As the
chart below shows, there is currently a direct correlation between the level of
formal education and the unemployment rate. The more educated you are, the less
likely you are to be unemployed.
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Educational Attainment
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Unemployment Rate
April 2010
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Less
than high school diploma
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14.7%
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High
school graduate, no college
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10.6
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Some
college or associate degree
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8.3
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Bachelor's
degree and higher
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4.9
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The
fact that the most highly educated people in our population have a relatively
low unemployment rate of 4.9% may help explain why consumer spending hit an
all-time high in March, according to MarketWatch. People with a higher
education tend to earn more and since 95% of that demographic is employed, that
has helped reinvigorate consumer spending.
The
overall unemployment rate of 9.9% is unacceptably high and understandably grabs
the headlines, but looking at the composition of that number suggests the
damage to the economy might not be as bad as first thought. Digging beneath the
headlines like this helps us make better assessments of the current economic
and investing environment.
Weekly
Focus - Think About It
It's
a shallow life that doesn't give a person a few scars."
--Garrison
Keillor
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Best regards,
Jim Forcella, CFP®, CFS
LPL Branch Manager
LPL Investment Adviser Representative
CA Insurance License #0635256
P.S. - Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.
Closing Reminders - Should your personal or financial situation change (i.e. Marital or employment status, beneficiary changes or income needs) please contact us at 530.222.6301 or 800.546.5573 for either a phone review, or an appointment. We want to ensure that your current financial objectives meet your personal circumstances.
Forcella Wealth Management Information - Are you receiving too much mail regarding your investments? You now have the option to receive your LPL Financial communications electronically! LPL Financial is pleased to offer the convenience of viewing shareholder communications, including the fund prospectus, annual reports, and proxy statements online. Visit the link below to be directed to a secure website where you will enter your LPL Financial account number and Email address. You will no longer receive shareholder communications information through the mail but can request a hard copy at any time. Please feel free to contact us if you have any questions regarding this form.
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Forcella Wealth Management
1600 Victor Ave ● Redding, CA 96003
Phone 530.222.6301 ● Toll Free 800.546.5573 ● Fax 530.226.1677
jim.forcella@lpl.com ● www.forcellawealth.com
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*
This newsletter was prepared by PEAK.
*
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 DJ Global ex US is an unmanaged group of non-U.S. securities designed to
reflect the performance of the global equity securities that have readily
available prices.
*
The 10-year Treasury Note represents debt owed by the United States Treasury to
the public. Since the U.S. Government is seen as a risk-free borrower,
investors use the 10-year Treasury Note as a benchmark for the long-term bond
market.
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Gold represents the London afternoon gold price fix as reported by the London
Bullion Market Association.
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The DJ Commodity Index is designed to be a highly liquid and diversified
benchmark for the commodity futures market. The Index is composed of futures
contracts on 19 physical commodities and was launched on July 14, 1998.
*
The DJ Equity All REIT TR Index measures the total return performance of the
equity subcategory of the Real Estate Investment Trust (REIT) industry as
calculated by Dow Jones.
*
Yahoo! Finance is the source for any reference to the performance of an index
between two specific periods.
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Opinions expressed are subject to change without notice and are not intended as
investment advice or to predict future performance.
*
Past performance does not guarantee future results.
*
You cannot invest directly in an index.
*
Consult your financial professional before making any investment decision.
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Securities Offered Through LPL Financial Member FINRA/SIPC
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