• In 1948 Goodyear Tire and Rubber Company celebrated its 50^th anniversary.  In February, 1949 they placed an ad in a magazine.  We’d like to read from part of it:  “Still, our American economic system remains the best in the world and yet it is under constant attack.  It is understandable that these attacks come from without, from parts of the world centuries older than the United States but where forms of government without our right of free enterprise have failed to match our nation’s exploits and accomplishments.  Difficult as it is to comprehend an attack from within, our dominant position in the world – our well being – in fact our future freedom depends solely upon the continued success of American business.  The system of free enterprise is an American heritage that must be further enhanced if the next 50 years are to be as golden as the five decades immediately passed.”

 

Even then, our American free enterprise system was the backbone of America – just as it is today.

 

• We want to thank our friends from Al Frank Asset Management for allowing us to quote extensively from thePrudent Speculator Weekly Market Commentary.  TheExecutive Summary was written Monday evening, September 5^th and tried to put in perspective some of the things happening in the U.S., in the markets, and in the world, especially as it relates to unemployment.  As is the case in almost all reports, there is both good and bad news when you take the time to look: 

 

“Of course, given the dismal jobs report out on Friday, we know that the labor situation is not a positive as no new net jobs were created during August.  Yes, the Verizon Communications…strike led to a temporary 45,000 job reduction in the overall count, but it was hard to call the report anything but weak.

 

Still we can’t forget that 139,627,000 people were actually employed and that despite an overall unemployment rate that remained at an uncomfortably high 9.1%, the jobless figure for those with a bachelor’s degree or higher stood at 4.3%, compared to 4.6% a year ago and 4.8% in August 2009.  It is interesting to note that the number of people employed today is slightly higher than what was seen in August 2004, when the overall unemployment rate was 5.4%, the point being that there are still plenty of folks with jobs.

 

We are not suggesting that happy days are right around the corner, but we can’t forget that we are investing in corporations and not the economy (emphasis added).  True, we’d rather see solid economic growth, but, as Barron’s Magazine pointed out this weekend:  ‘foreign sales constitute 46% of the total for S&P 500 companies.  Sales of the S&P 500 were up 10% in the second quarter from a year earlier, while real final sales to domestic producers (gross domestic product minus inventory changes and trade effects) were up only 3.8% without adjusting for inflation…employment at the S&P 500 companies rose 10.6% between 2009 and 2010 while total U.S. employment edged up just 0.7%.’

 

Given that the yield on the Ten Year Treasury Note is now below 2% while the dividend yield on the S&P 500 is closing in on 2.5%, we will be putting more money to work this week in three of our four Newsletter portfolios…

 

We will close this brief missive by reprising perspective from Gregg Easterbrook that we published back in 2008.  In his book, The Progress Paradox:  How Life Gets Better While People Feel Worse, Mr. Easterbrook compared things nowadays to previous generations.  Despite consumer confidence readings that are actually worse today than after 9/11, worse than right before the first and second Gulf Wars and even worse than during the ‘70s when inflation and interest rates spiked to double digit levels, we could certainly argue that conditions aren’t so bad…

 

‘Today we live a long time, in fairly comfortable circumstances; enjoy goods and services in almost unlimited supply; travel where we wish quickly and relatively cheaply; talk to anyone in the world; know everything there is to know; think and say what we please; marry for love, and have sex with whomever will agree; and wail in sorrow when anyone dies young, for this once routine event has become a wrenching rarity.  All told, except for the clamor and speed of society, and for trends and popular music, your great, great grandparents might say that contemporary United States is the realization of Utopia.’”

 

Need we say more?

 

• During the summer months the price of gasoline normally increases as Americans enjoy their summer vacations.  This summer, however, the price of gasoline dropped 16.3¢ per gallon from the beginning of June until the end of August.  Every one cent decrease results in a savings of $3.4 million per day for Americans, freeing up additional money for other uses.  (Source:  AAA, Fortune) 

 

• Needless to say, real estate has had a significant negative impact on the economy over the past few years.  Sometimes it helps to look back at where we were and what has happened in the meantime.  While every market is different, according to the Case-Shiller Composite Home Price Index, home values peaked in the second quarter of 2006 and as of June 30, 2011 prices had dropped nearly 32% nationwide.  As we entered September 2008 the financial crisis was just beginning, punctuated by the bankruptcy of Lehman Brothers.  Recognizing that mortgages were out of control, the government stepped in to help Fannie Mae and Freddie Mac with a pledge of up to $200 billion of financial support, which was later doubled to $400 billion.  Through the end of August, the government has actually given them “only” $142 billion of taxpayer aid. 

 

There is improvement occurring within the mortgage industry.  As of June 30^th, 8% of the mortgages had at least one payment past due and another 4% were in the foreclosure process.  This compares to a year earlier where those numbers were 10% and 5% respectively.  (Source:  Office of Federal Housing Enterprise Oversight; Treasury Department; Mortgage Bankers Association)

 

• This will probably not come as a surprise to a lot of parents, but we think this information from the Department of Agriculture is rather sobering.  A family with pre-tax income of at least $100,000 and a child born in 2010 will spend $377,000 to raise that child through age 17.  Adjust that number for inflation and it increases to $477,000.  In answer to your next question…no, it does not include the cost of a college education. 

 

• Fear and greed are the two most common words used when it comes to Wall Street and the economy.  Today, clearly fear is winning out over greed and this was certainly reflected in the Conference Board’s reading of consumer confidence.  The Confidence Index fell to 44.5 in August, which was the same level as in April of 2009, just one month after the stock market began its recovery.  In other words, it was at the very bottom just as things were beginning to get better.  As difficult as it is, even for us, we try not to let our emotions get in the way of reality.  We continue to look at facts and, if you will, we look behind the curtain to find out what’s really going on.  First of all, we need to realize that on an inflation adjusted basis the economy has grown from April, 2009, when it stood at $12.565 trillion, to its current level of $13.393.trillion.  This puts it at a new all-time high – just barely surpassing the fourth quarter of 2007.  This issue, of course, is rooted in the fact that while the economy has reached the former record, it is now spread out over more people, and unfortunately, we have had virtually no gain in employment during that same period of time – in fact, there are about 200,000 less people employed today than there were in April, 2009.

 

This leads us into the President’s plan to create jobs.  While we think the approach he is using may help a little in the short run, in our opinion it probably won’t provide enough job creation to really make a difference, and it most likely won’t help in the long run.  You can’t fix a long term problem with a short term solution.  There is no question that reducing the Social Security tax to 3.1% in the coming year will put more money into the hands of consumers, thus giving them more money which they will likely spend, but it probably isn’t enough to really create jobs.  While we are pleased that the President also extended this Social Security cut to businesses but limited it to the first $5 million of payroll, it’s probably not enough to change the decision of most small business owners about hiring new employees.  In fact, one could argue that these cuts in Social Security taxes will only exacerbate the Social Security issues that need to be resolved. 

 

In our opinion, Congress and the President need to do two things.  The first is to develop a long-term, permanent solution to the Tax Code and to remove regulations that are, at best, postponing the decisions of employers to hire, and in some cases, driving jobs overseas. 

 

Here’s what we would do if we were leaders in Congress:  we would identify each and every one of the parts of the package where there is common agreement and pass them as quickly as we possibly could.  Unfortunately, in his speech, the President basically presented the job creation bill as if it were an “all or nothing” proposition, and that he would veto a piecemeal approach.  Fortunately, he seems to have backed away from this “all or nothing” proposition.  While we certainly understand his desire to do this, at the moment, we would prefer Congress to have a quick and unanimous agreement on something – rather than to continue to make a mockery of the system and fools of themselves.

 

One thing that really confuses us is the President’s plan to spend more money on infrastructure.  While we agree with him on this, the reason for our confusion is that, currently, not all of the stimulus money has been spent.  Why not put that money to work right now, since it’s already been authorized by law?

 

 

 

(c) ProVise Management Group

www.provise.com