ProVise Management Group, LLC, an SEC Registered Investment Advisor

PROVISE BULLETS ©

(May 15, 2009)

• While we certainly don’t want to suggest that there will not be continued downward pressure on the market, the impressive rally coming off the March lows can’t be ignored.  The S&P 500 bottomed out at 667 intraday on March 9, 2009.  This set a new bottom following the November 2008 decline.  Since that time, in a little more than two months, the S&P 500 climbed a rather astonishing 34% as of May 14, 2009.  It was higher prior to this week.  The skeptics, i.e., those who see the “glass half empty” will tell you that this is a bear market rally and that there is a lot of bad news still ahead.  The optimists, i.e., those who see the “glass half full” will tell you that there is still bad news ahead, but the bottoms are behind us.  We lean toward the optimistic side of the equation.  The money from the TARP program which began under the Bush Administration is just now beginning to have an impact on the economy, and the stimulus package will kick in sometime during late Summer or early Fall.  In the near term, we are concerned that Europe is not stimulating their economy in the same manner as the United States, and notwithstanding those who contend that China continues to exhibit strong growth, the Chinese government can only support their economy for so long.  We don’t expect the market to continue to see the types of gains over the next couple of months that it has seen during the past couple of months – it needs a rest, and perhaps a healthy correction during that rest period.

• Before the year is over, it is highly likely that changes will be made to the estate tax laws.  This year you can leave $3.5 million estate tax-free to your heirs.  Next year there is no estate tax, and in 2011 the amount you can leave estate tax-free returns to $1 million.  There are several Bills sitting in Congress, the most recent of which was introduced by Representative Joseph Pitts (R-PA).  HR1960 calls for a repeal of the estate tax.  Two other Bills also call for repeal in slightly different ways.  We will keep you posted on what steps Congress takes regarding the estate tax laws. 

• The American consumer/public continued to slash debt during March, as consumer borrowing dropped precipitously 5.2%, which meant that it declined $11.1 billion.  This is the largest dollar decline in over 65 years.  As we break this total number down and bore into some of its components, we see that automobile loans fell 4.2% and credit card borrowing fell 6.8%.  While some of this is clearly due to people cutting back on spending because they choose to, some of it is forced as a result of the continuing job losses.  Although the pace of losses has slowed, in April we lost 539,000 jobs.  This is not a good number, but it could be an indication that monthly job losses are moderating.  Unemployment rose to 8.9% which is the highest it has been since 1983.  You can expect this number will continue to rise in the face of a recovery, because unemployment is a lagging economic indicator.  As we come out of this recession, however, the pent up demand of consumers and businesses could cause some dramatic swings in these numbers.

• Let’s stroll down history’s lane back to 1976 when Jimmy Carter was elected President.  Inflation was boiling at the time he took office, and he decided that deficit spending was needed in order to get the economy going again.  Of course, this decision resulted in significant borrowing by the government and ultimately significant inflation.  Carter replaced one Federal Reserve Chairman with another, who was still unable to provide enough capital to cover all of the President’s deficit spending. The second Fed Chairman left, which led to the appointment of Paul Volker, who at the time was President of the New York Fed (the same place that Treasury Secretary Geithner came from).  Volker recognized that high interest rates alone were not going to stop the inflation in America – only taking money out of the system would accomplish this.  Carter was upset by all of this because he was hoping to get reelected by having significant economic growth.  The Carter Administration put pressure on Volker to ease up, and he did, and as soon as he did, inflation began to rage.  Voters replaced Carter with Reagan.  

• With all of the deficits that Obama and Geithner are talking about incurring over the next ten years, interest rates on long-term bonds are likely to go up in anticipation of inflation.  In fact, that is already starting to happen.  The rate on the 30 year treasury bond has already increased this year from 2.8% to over 4%.  Although the President would like to institute all of his ideas, the free market system, especially the bond market, may not allow him to do so.  

• As incredible as the federal deficit was for 2008 at a record $459 billion, it seems almost inconceivable that the deficit for 2009 will be about four times that amount at $1.84 trillion!  This is due primarily to the government’s Stimulus Package, the bailout of Wall Street, and lower tax revenues.  Currently, the White House is projecting a deficit for 2010 of around $1.3 trillion, and if past experience is any indication, this number is likely to be higher as time goes along.  Many of the figures are based on current projections which somehow always seem rosier than future realities.  The deficit is expected to represent 12.9% of GDP in 2009 which would be the largest on a percentage basis in the past 60 years.

• Here come the Baby Boomers and just at the wrong time!  The first of the Baby Boomers will turn 65 in 2011, about a year and a half from now.  Based on the annual report on Medicare and Social Security, Social Security is expected to run out of money in 2037, which is far enough into the future that Congress can continue to ignore this mounting problem.  What they can’t ignore is the report that Medicare is expected run out of money in 8 years.  The immediacy of this issue will help President Obama and Congress pass health care reforms this year, or at least help launch a major effort.  This may lead to some significant changes, not only to Medicare, but to private insurance as well.

• Good news!  Some of the airlines are installing new seats on many of their planes, which will be more comfortable, and because they are thinner, should theoretically provide a little more leg room.  Oops!  Bad news!  They have decided that they can squeeze in two more rows of passengers with all the “extra” space.  Looks like flyers might be a little more comfortable in some respects, and no more comfortable in others.

• So, have you heard the one about “cash for clunkers”?  This is an idea that Congress is warming up to which it borrowed from Europe.  It is designed to replace old, poor fuel efficient vehicles with newer vehicles by getting you to trade in your car that you have owned for at least a year, and has a fuel economy rating of 18 miles or less per gallon.  You then must purchase a new car for $45,000 or less, which must have a fuel economy rating of 4 miles per gallon higher than your old car.  This will get you a $3,500 voucher from the government.  If you buy a car with a fuel efficiency of 10 miles higher than your old car, then the credit is $4,500.  You don’t actually get the cash, you just pay less for the new car, and the money is sent to the dealership.  Other than getting a newer car for a lower price, is this really worth it?  Let’s assume the owner drives the car 1,000 miles per month.  Let’s further assume that the driver gets the full 10 miles more per gallon, going from 18 miles per gallon to 28 miles per gallon.  Let’s further assume that gas is selling for $2.25 per gallon.  In the old car, the driver would have purchased 667 gallons of gas per year at $2.25, costing a total of $1,500.  At 28 miles per gallon, the owner only needs to purchase 428 gallons, and thus, the annual cost is $964.  In terms of cash flow savings, therefore, it saves $536 per year, or about $45 per month.  Assuming that the cost of the car does not kill the purchaser’s cash flow, this could be a very attractive program.  That’s why the government is betting that it will add one million new car sales in the first 12 months.

As always, we encourage you to give us a call if you would like to discuss anything further.  We will visit again soon.

RAY, KIM, ERIC, BRUCE, and LOU

©5/15/09 ProVise Management Group, LLC

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