ProVise Bullets

ProVise Management Group, LLC, an SEC Registered Investment Advisor

PROVISE BULLETS ©

(September 15, 2009)

• Have you ever heard of David Walker?  He’s President and CEO of the Peter G. Peterson Foundation.  You probably haven’t heard of him, and neither had we until we read an article which appeared recently in The Wall Street Journal.  Mr. Walker left as the Head of the Government Accounting Office only five years into his fifteen year term because he didn’t “feel like he was really making a difference”.  This fiscal conservative is now raising awareness about the looming federal deficits, both the ones in the headlines and the ones behind all of the socially popular programs like Social Security and Medicare.  According to Mr. Walker, our $1.8 trillion deficit this year breaks down to “$3.4 million per minute, $200 million per hour, and $5 billion per day.”  Mr. Walker has a book coming out in January titled Come Back America.  We won’t be surprised if it’s a big hit, as his proposal make a lot of sense.

• While there was much to cheer about the job loss numbers, and even the unemployment number in spite of the fact that it jumped from 9.4% to 9.7%, the fact remains that the long-term economic recovery will only occur when jobs begin to be added, not lost.  The better than expected job loss number (by 9,000) was welcome news, but not enough to make either the bulls or the bears feel much different.  According to the Department of Labor, America has lost 6.9 million jobs since the recession started.  As we have shared in the past, the unemployment numbers are a lagging indicator to economic recovery.  After shedding workers over the past year and a half, businesses will be slow to add workers back, and we won’t see huge gains in jobs until employers feel more confident that the recovery is the “real deal”.

• Last week, President Obama made a case to Congress and the American people on his Health Reform Bill.  No matter where you stand on the issue, the fact of the matter is that things will become more expensive.  During the fiscal year ending 9/30/09, it is estimated that the government will pay out $1.36 trillion for Social Security, Medicare, and Medicaid.  This represents 37% of the total government budget.  In just ten years, this figure is expected to jump to $2.48 trillion, or 47% of the budget at that time.  If we add more expense, then obviously the percentage is likely to go up as well.  To put into perspective just how much $1.36 trillion is, visualize a stack of one hundred dollar bills 923 miles high.  (Source:  Office of Management and Budget)

It has been clear to us for some time that “something” will pass – it’s just a matter of how comprehensive it will be.  While we are certainly in favor of health care reform, we have many concerns about the President’s plan and what it might do to the deficit.  Trying to solve the problems of access, cost, and quality in one Bill is a Herculean task.  We mention this only in the context of costs for the moment.  Given the government stimulus and bail out packages, the deficit this year is expected to be $1.6 trillion.  According to President Obama’s own estimate, the climbing deficit will not slow down in any significant way.  Was it only 10 years ago that a Democratic President (Clinton) and a Republican Congress led us to having a surplus?  Regardless of what any politician tells you, taxes will go up, and while they may go up mostly for the so-called “rich”, they are likely to increase for most taxpayers, both directly and indirectly.  The longer people act like ostriches and bury their heads in the sand over the deficit situation and a continuing demand for more services from government, the more difficult it will be to solve the problem.  From a personal financial standpoint it should cause all of us to rethink so-called “traditional wisdom”.  We have talked about deferring income into retirement plans as much as possible under the theory that in retirement most people will likely be in a lower tax bracket than during the working years.  Should tax rates go up, however, this “traditional wisdom” could be turned upside down.  For example, most financial planners have advised their clients to put, at a minimum, enough to get the full employer match into their 401(k) and to max out their contributions as much as possible.  Perhaps now the maximum one should consider putting into the 401(k), especially if more than 10 years away from retirement, is the same amount that used to be the minimum.  If they qualify for a Roth IRA, they should perhaps put some money there, and if they qualify for a Roth 401(k) and it is available through their employer, they should perhaps put the rest of their money there.  We are not ready to jump on that bandwagon, but it is one of many strategies which should be considered in a rising tax environment.  Individual circumstances vary widely so it is important to carefully weigh all the options.  

• On Monday, August 31st, the headline in the business section of one of the major national newspapers read, “Grounded Financials Regain Wings”.  Of course, it was the very next day (September 1st), that financials, which had risen dramatically since March 9th, (according to Standard & Poor’s, the financial sector was up 137% through the end of August), helped cause the market to decline 2%.  Does it come as any surprise that investors, who have experienced such significant gains, might want to actually cash in and take some profits?  Consequently, financials will likely remain very volatile.  We can’t think of any other investment that goes up that much in such a short period of time that investors would not consider taking some “chips off the table”.  On a longer-term basis, however, the financial stocks are still significantly below where they were just a year ago, let alone where they were two years ago.  As banks begin to repair their balance sheets and get back into the business of lending money, their earnings will reappear.  When that happens, this sector will probably be a long-term winner. 

• There is some good news for employers and employees regarding Social Security.  The wage base, which was $106,800 in 2009 is going to remain the same.  This is the first time since 1971 it has not climbed.  Tax rates will remain the same.  The news is not as good for those receiving Social Security benefits, as they will not receive a cost of living increase.

• Last week, the dollar hit a low against the euro for the year, where it would only buy 0.68 euro.  This is a 16% drop in the dollar’s relationship to the euro from its high earlier this year.  What does this mean to American investors?  First, if they are planning on traveling to Europe, it is now a lot more expensive to do so.  Anything made in Europe and imported to the United States is also more expensive.  Thus, it is possible we could be importing some inflation.  Conversely, a weaker dollar means that U.S. goods and services are cheaper which could cause a higher demand from foreign buyers.  It’s also a big positive for multi-national companies whose sales are increasing overseas.  As a result, if you own shares of those companies in dollar terms, it could result in increasing share prices.  A case can be made for the benefit of a strong dollar as it was during the Clinton years, or a case can be made for the advantages of a weak dollar, in order to increase our exporting ability.

• Remember those high flying endowment funds at all the fancy Ivy League schools and how they were run by so many “bright” people?  We’ve now learned that they were not immune to significant drops in their portfolio values.  This past week Harvard, which perhaps received the greatest amount of publicity, indicated that through June 30th, its endowment fund had declined by 27.3%, while Yale University’s endowment fund fell 30.4%.

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

©9/15/09 ProVise Management Group, LLC

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