ProVise Bullets
ProVise Management Group
By Team
March 15, 2011
· It's hard for anyone to imagine the devastation that has occurred in Japan. Mother Nature has reminded us once again of her awesome power and just how humbling this type of power is. Our thoughts and prayers go out to all of the Japanese people, but especially to those who have lost loved ones and/or who are injured. At times such as this economics need to take a back seat, but we'd be remiss if we didn't comment since the Japanese market dropped about 17% and our own markets are experiencing extreme volatility. In the short-run, this can't have a positive effect on worldwide growth, which we will explore further in a few weeks. Having said that, in the long-run, it could be an equally strong engine for growth as Japan starts rebuilding and the world is there to help. The Japanese are a very stoic and resourceful people and unfortunately, they have dealt with tragedies before including the nuclear bombs at the end of World War II. Only time will tell how much suffering lies ahead, so for now, let's just offer our thoughts and prayers to everyone who has been affected by this cataclysmic display of power by Mother Nature.
· There's been a lot of talk in Congress about "balancing the budget", but the reality is that it's a long way off - maybe as much as another 10 years, and that's assuming that a lot of things go right. It seems like such a simple thing, but really it's very difficult. Forty-one percent of all government expenditures go to pay for entitlement programs like Social Security, Medicare, and Medicaid, and taking money from those programs is currently off the table. Republicans want to reduce spending by $60 billion this year and $40 billion more next year. While certainly any cuts help get us closer to having a balanced budget, there is a cost that comes with it. Some predict that this type of reduction in spending could take as much as one-half of a percent off of GDP. This is not something either political party wants to take responsibility for as we continue to move out of the recession. So, if you can't reduce expenses quickly enough, what about increasing revenues, i.e., taxes? Don't expect any action to be taken on this front until after the 2012 elections. In short, the Republicans will likely get some small cuts, but not as much as they are asking for, just to prove that they did something. Don't expect the unemployed going back to work to solve the problem. It will help, but the problem is way too big to be solved by even 2 million people returning to work.
· In an interesting twist, during the month of January consumers increased the annual rate of borrowing by $5 billion. Most of that was for the purchase of automobiles. Conversely, credit card debt continued to fall as it has for nearly two and a half years now. It seems as if everyone is paying down debt and borrowing less, except for the people in Washington, DC.
· It was two years ago on March 9, 2009 that the market hit a low in the bear market. Over the intervening two years, the S&P 500 gained approximately 95%. This is the best two year result following a bear market since 1949. This is the 11th bull market for the S&P 500 since that time, with 70% of the bull markets lasting three years and 50% lasting five years. What happens with this one remains to be seen. It is quite possible that the Dow will retreat to 11000 before it reaches 13000. Think back to the first quarter of 2010 when the market was up nicely. Then, from a level of about 11200 on the Dow, it tumbled to about 9800 by early July. Fortunately, most investors did not panic, remained invested, and were able to enjoy the current almost nine month positive run without a 10% correction. It will take this same type of fortitude when a correction occurs again. (BTN Research)
· A recent report from CoreLogic reminded us that the housing market, while perhaps becoming a little more steady than it has been, still has a long way to go. In their most recent report, 11.1 million homes (23.1% of all mortgages) were upside down during the fourth quarter of 2010. That is to say, people owed more than the home was worth. Another 5% of mortgages were very close to falling into negative equity territory, which represents 2.4 million additional mortgages. Not too surprisingly, Nevada had the worst result with about 66% of homes being upside down. Other Sunbelt states in trouble included Arizona, Florida, and California, with about half of the homes having negative equity. This increase in the number of households with negative equity portends that we still have a long way to go to recover from the housing bubble.
· Here's another little fact to put new home sales into perspective. The median sales price of a home in 2010 was $221,900. This is essentially the same that it was in 2004. (Source: HUD)
· A billion here - a billon there - the next thing you know, you could be one of the wealthiest people in the world. Forbes came out with its 25th annual ranking of billionaires this past week, and according to the report, Mexico's Carlos Slim, the Telecom mogul, is worth $74 billion. He increased his wealth by a whopping $20.5 billion this past year! Bill Gates is the richest American with $56 billion, and he is followed by Warren Buffet with "only" $50 billion. Rounding out the top five is Bernard Arnault from France with $41 billion, and Larry Ellison with $39.5 billion. The world produced 1,210 billionaires last year, which was a record. This list showed the power of emerging countries, as Russia and China both have over 100 billionaires, while Brazil and India showed great strength.
· Republican lawmakers may have gotten a PR boost for their attempt to cut $60 billion out of the budget. The Treasury Department announced last week that the largest monthly deficit in history was created in February, at $222.5 billion, surpassing the previous record set last February at $220.9 billion. As bad as it seems, the news wasn't all bad, as revenues were up 8.6% and spending was only up 4%. That's a move in the right direction. The biggest concern we have, and the one lawmakers have the least control over is rising interest rates. Given the expanded debt and larger deficits in the future, a one or two percent increase in long-term interest rates will make it that much more difficult to get to a balanced budget.
· Effective April 1st (isn't that an appropriate date?) the IRS will start charging 4% for over-due taxes. Corporations that owe more than $100,000 will have to pay 6%. The IRS will also pay 4% to individuals and 3% to corporations on any refunds. Here's a twist, however: The IRS does not pay interest on refunds made by May 30th, assuming tax returns were filed by April 15th, and they can take off up to 30 days of interest on any refunds made after May 30th. (Source: IRS)
· In most states, creditors in bankruptcies cannot get at assets within an IRA. There are some questions, however, concerning whether an inherited IRA has the same protection. Recently, the District Court in Arizona said that the answer is "yes". A beneficiary, who was the daughter of the original owner, had filed for bankruptcy, and the creditors were trying to get at those assets. The court said that the protection is extended, not only to the IRA owner, but to the beneficiaries as well. It should be noted, however, that not all District Courts agree and eventually, this will have to be settled at a higher level. (Source: Kiplinger Letter 3/4/11)
· This month has several dates worth noting, not the least of which was that eight years ago on March 20th the Iraq war started. At that time, the S&P 500, an unmanaged Index of 500 widely held stocks which are generally representative of the U.S. stock market, closed at 876. As of last Friday, the S&P 500 was at 1304. The ten years beginning with 2000 are often referred to as the "lost decade". However, should our markets continue to do well over the next couple of years, the "lost decade" could easily turn into a missed opportunity for those investors not in equities for the decade of 2003 to 2013. (Source: BTN Research)
As always, we encourage you to give us a call if you would like to discuss anything further. We will visit again soon. Proudly and successfully serving our clients for 25 years in 2011.
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