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Weekly Update - August 29, 2011

Why Do We Even Listen to Bernanke?

In This Issue
Performance
Headlines
Golf Tip
Green Fact

Dear  , 

 

Between Hurricane Irene's thrashing, Steve Jobs' resignation, and Ben Bernanke's annual economic conference, there were a number of important headlines last week. In the midst of them all, U.S. stocks managed to log their first winning week in five as major indexes all closed over 4% higher.  

 

According to many pundits, much of the stock market's positive performance can be attributed to reassuring words from Fed Chairman Ben Bernanke's speech on Friday, during which he focused on the long-term strengths of the U.S. economy and touted that growth fundamentals "do not appear to have been permanently altered by the shocks of the past four years."[1] 

 

While acknowledging the challenges we are facing, the overall tone of his speech was optimistic. After reminding his audience that "the financial crisis that gripped global markets in 2008 and 2009 was more severe than any since the Great Depression", he stated that "restorative forces are at work today, and they will continue to promote recovery over time."[3]

 

The Fed Chairman concluded his comments on a positive note by reinforcing that even though policymakers have a tough job in supporting economic recovery while also tackling long-term debt, "those challenges can be met and the fundamental strengths of our economy will ultimately reassert themselves."[4]  He also went on to pledge that the Fed will keep short-term interest rates low, and will do "all it can" to help the recovery.[5]

 

For an alternative view of Bernanke's speech I would suggest that you read this article from today's Wall Street Journal!

  

St. Augustine at the Fed Ben Bernanke delivers a political lecture

 

The real question is how much should we listen to Mr. Bernanke? Is it his job to give us honest economic analysis, or is it his job to be a cheerleader? Let's take a look at some other things he has said.

 

Housing

 

(October 20, 2005) "House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals."

 

(February 15, 2006) "Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise."

 

(March 28, 2007) "At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency."

 

(May 17, 2007) "All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable."

 

(July, 2005) "We've never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don't think it's gonna drive the economy too far from its full employment path, though."

 

Ok, so he blew it on housing. What else?

 

Recession

 

(January 10, 2008) "The Federal Reserve is not currently forecasting a recession."

 

(June 10, 2008) "The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so."

 

The National Bureau of Economic Research is the group that officially dates the beginning and ending of recessions. According to the NBER, the Great Recession started in December of 2007 and lasted until June of 2009. As you can see, both of the recession quotes were made during the recession.

 

Current Economic Conditions

 

"The money supply is not changing in any significant way. What we're

doing is lowering interest rates by buying Treasury securities."

 

Really? Take a look at this chart of Money Supply. Looks like all three measures are rising to me.

 

M1-M3 Money Supply 8-29-2011 

 

(February 3, 2011) "Although economic growth will probably increase this year, we expect the unemployment rate to remain stubbornly above, and inflation to remain persistently below, the levels that Federal Reserve policymakers have judged to be consistent over the longer term."

 

That was before he knew that 1st quarter GDP had dropped from 3.2% to 1.9% in one quarter, and that was in the middle of QE2!! (The government later adjusted the figures down to 2.3% and .4%)

 

How do we know who to listen to?

 

What we do here at Reames Financial is try to sort through the noise so that we can highlight the views that we think are important to your long term financial health, and in a similar fashion highlight the views that we think are extremely lacking in their ability to be useful in managing your finances. We happen to think that when someone is that consistently wrong, you should take their views with a grain of salt.

 

You may not always agree with our analysis but at least you know you will always get an alternative view here!

 

ECONOMIC CALENDAR:                                            
Monday - Personal Income and Outlays, Pending Home Sales Index
Tuesday - S&P Case-Shiller HPI, Consumer Confidence, FOMC Minutes
Wednesday -ADP Employment Report, Chicago PMI, Factory Orders, EIA Petroleum Status Report
Thursday - Jobless Claims, Productivity and Costs, ISM Mfg Index, Construction Spending, Motor Vehicle Sales
Friday - Employment Situation
  

 

 

Performance


8_29_Graph_3

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. N/A means not available.

HEADLINES:

Steve Jobs has resigned as chief executive officer of Apple. The company has promoted Chief Operating Officer Tim Cook to the position of CEO and said that Cook will join the company's board of directors. Jobs will become Apple's chairman.[7]

Warren Buffett struck a deal with Bank of America on Thursday, to inject $5 billion in capital in exchange for preferred shares that pay a 6% dividend, and warrants to buy 700 million common shares at $7.17. This deal comes at an opportune time for the bank and helps calm market concerns that Bank of America is under-capitalized.[8]

The six biggest U.S. airlines canceled at least 10,300 flights from Saturday through Monday because of hurricane Irene.[9]

Refiners and fuel shippers were taking stock of their operations early Sunday after a night of high winds and rains, but so far no major damage had been found. Most of the refineries and fuel shippers who had been bracing for Irene were dealing early Sunday with relatively minor power outages and water buildups.[10]

 

 

Quote of the Week
"Our best successes often come after our greatest disappointments."
 - Henry Ward Beecher
Golf Tip
Grip it and Rip it

 

Most power tips have to do with the physical components of generating speed and power in the golf swing. In this case, the power tip is a mental one.

To hit your longest and straightest drives, you must be mentally geared up to unleash your potential power. You can't go deep if you're filled with fear or anxiety about the outcome of the shot. Some well-known instructors like Jackie Burke Jr. and Jim McLean advocate the idea of being a "little reckless" with the driver. Not that you should truly be "reckless", but it is important not to become overly analytical before and during your swing. Every once in a while, it's okay to trust yourself and let your athletic instincts take over.
 
Green Living
Donate Your Stuff

Got a bunch of stuff you want to get rid of? Don't contribute to the landfill. If it's usable, give it to someone who needs it. Or donate it to a charity thrift shop, Second Impressions on Westnedge comes to mind, - they can sell it for a little bit of fund-raising cash, so you're not only lengthening the life of that item but helping a good cause. The habit to develop: When weeding out your old stuff, put them in a box or basket near the door. Then when you run errands, grab the box and drop it off at a charity shop. If it's an expensive item, you could email your friends and family to give them the first shot at it.


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Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

  

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 average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA was invented by Charles Dow back in 1896.

 

The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.

 

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.

 

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

 

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.

 

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These are the views of Reames Financial and not necessarily those of Foothill Securities, Inc., and should not be construed as investment advice. Neither Phil Reames, Reames Financial, nor Foothill Securities, Inc. gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.

 

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 [1] http://www.federalreserve.gov/newsevents/speech/bernanke20110826a.htm 
 [2] http://www.usatoday.com/money/markets/story/2011-08-26/Stocks-recover-after-Bernanke-speech/50148070/1
 [3] http://www.federalreserve.gov/newsevents/speech/bernanke20110826a.htm 
 [4] http://www.federalreserve.gov/newsevents/speech/bernanke20110826a.htm 
 [5] http://www.federalreserve.gov/newsevents/speech/bernanke20110826a.htm 
 [6] http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm 
 [7] http://finance.fortune.cnn.com/2011/08/24/fallen-apple-steve-jobs-resigns/ 
 [8] http://www.forbes.com/sites/greatspeculations/2011/08/26/buffetts-capital-never-comes-cheaply-as-bofa-knows/ 
 [9] http://www.bloomberg.com/news/2011-08-28/flight-cancellations-in-u-s-resulting-from-hurricane-irene-exceed-10-300.html
 [10] http://online.wsj.com/article/BT-CO-20110828-703803.html 

 

Phil Reames
Reames Financial
1856 Skyler Dr.
Kalamazoo, MI 49008
269-349-3966
[email protected]
http://www.reamesfinancial.com