Consumer spending keeping the stock market up

The 3rd quarter earnings report of most of the reporting companies in the S&P 500 beat analysts’ estimates.  This is due to a combination of higher sales due to more consumer spending and reduction of expenses because companies have become more efficient.  This combination of more revenue and less expenses is giving many companies a healthy cash flow that should find its way into capital investments and stock purchase.

What is fueling consumer spending?  It seems that Americans are resigned to a Hillary Clinton presidency and they think it won’t be so bad.  There also has not been any terrible news lately. In addition to the good earnings reports, oil is holding at about $50 per barrel and copper price has been hovering around $2 per pound. The doom sayers are wrong again about the big stock market crash that they predicted would happen before the U.S. presidential elections.  The BIG CRASH will happen but it will not be before November 8.  Folks, it may not even happen until 2018.  I see the road to the next recession as a slow bleed not a heart attack. We are due for a 10-20% correction since the last correction was in the middle of February this year.  We will discuss this on the next blog.  Stand by.

Elections & the Stock Market, What Me Worry?

If you have been following my articles, you know too well that I am a fiscal conservative.  I had been tough on President Obama from the time he took office but I must admit that I made a lot money since 2009.  Many of my readers have written me emails asking how the stock market will react if Hillary wins, if Trump wins.  First of all I agree with Larry Kudlow that in the short run Trump’s tax plan of reducing individual, corporate and capital gains taxes is good for the economy and for stocks as was proven by JFK, Reagan and Bill Clinton.  Reducing tax on foreign capital is also great for the economy because repatriation of foreign earnings is money that will find its way into the stock market.  Folks, remember my example on the basics of the law of supply and demand which is again repeated below:

Imagine you are 1 of the 5 remaining finalists on the CBS show SURVIVOR.  You have not eaten any solid food in 5 days.  Jeff Probst, the host brings out a slice of pizza and gives each person $100.  He asks the players to bid an amount for the slice of pizza and the highest bidder wins.  Since there is only one slice, it is safe to say that each player would scramble to bid $100 for that single slice even though that slice normally costs only $2 in any fast food court because once that slice of pizza is gone, it’s gone.  What if there are 6 or 7 slices?  What if there are 20 slices?  Then the bidders will not have to bid so much because there are more than enough slices to go around. Everyone can get a slice even with a low ball offer.

How does this relate to the stock market?  Well, if billions of dollars keep entering the U.S. economy, where will it go?  Investments, new business ventures, real estate and yes the stock market.  Very little of it will go into treasuries, due to low interest and some of it will go into bonds.  But a great amount of it will find its way into the stock market.  Having said that, the polls indicate Hillary will win.  Hillary’s plan to increase taxes on those earning over $250,000 and increase tax on corporations from 34% to perhaps 40-50% and reduce estate tax exemption from $5 Million to $3.5 Million will have a negative effect on the economy in the short run.  In the long run, economists have long argued whether or not more money in the hands of the private sector is really better than more government spending.  Will $100 million in the hands of the board of directors of Procter and Gamble really be better than giving it to welfare recipients?  Procter and Gamble would probably invest the money on new equipment, increase hiring, salaries and bonuses and the recipients will spend the money thereby putting more money into the economy.  Welfare recipients would probably spend the money on food and household necessities thereby putting more money into the economy.  Your thoughts.

 

 

 

Countdown to the next stock market crash

We did it once before in 2007, we can do it again!  The countdown has begun to the next bear market, a 10% to 20% correction.  The Dow reached an all-time high on August 15, 2016 of 18,723.  Since then it has not breached that resistance level.  A 10% correction from this resistance level would bring the Dow down to 16,851 and a correction of 20% would bring the Dow down to 14,978.  Friends, I do not think we will experience a correction that will breach the 52-week low of 15,451.  It may breach this support level if the interest rate curve inverts which portends a recession in which case the Dow may lose 40-60% of its value.

I just don’t see it yet folks, no matter what the gloom and doomers say.  The interest rate curve is not flattening, the economy is sluggish and the Feds will not soon raise interest rates.  But even if the Feds raise the interest rate by 100 basis points right now, it is still sustainable in this current economic climate and it will not cause a negative yield curve.

Standby folks.  Those who made a lot of money in 2009 just by following my posts, will do it again when the next recession hits.  Meanwhile, be happy to be earning 4-8% with your money invested in VTSAX and other S&P 500 Index funds just like many other investors.  When the bear market that follows a recession hits, that is when we will make our real money.

Follow this blog and we will keep monitoring economic indicators that may cause the breach of the resistance and support levels in the Dow, S&P and NASDAQ.

Happy fishing!!!!

 

Living Rich & Loving It

The book I wrote, "Living Rich & Loving It" which is available on Amazon Kindle strives to develop a vision that being rich is not only about achieving financial independence.  It’s about living a happy, healthy, simple, balanced and fulfilling life with minimal stress.  This is a cradle to grave guide to life book.  If you have goals, dreams and aspirations in life, you have a sense of direction but you still need a road map to take you from here to there. I hope this book will serve as that road map for you.

Learn how to:

  • Find a job you love. If you cannot wait to get up and get to work every morning, then you’ve found the job you love.  Otherwise, you need to read the chapter, “Find a Job You Love” and the chapter, “Increase Your Income with these Ideas”.
  • Create a budget so that you will always have a surplus at the end of each month.
  • Maximize contributions to your retirement account and accumulate more than a million dollars for retirement.
  • Determine if converting to a Roth IRA or Roth 401k is right for you. Ed Slott, the IRA guru says converting your IRA to a Roth IRA is tantamount to moving your account from “accounts that are forever taxed to accounts that are never taxed”. WRONG!  See Chapter, “Your Retirement Plan”.
  • Never lose money in the stock market by using “The KISS Principle” and “Auto-Pilot Strategy”.
  • Predict the next recession by watching the “yield curve”. It is so simple yet so effective.
  • Calculate the amount of life insurance you need. Insurance brokers will hate this chapter. The answer will surprise you.
  • Avoid Veblen Goods – the savings will amaze you.
  • Shop around for everything. If you are struggling to make ends meet, this chapter will show you why.  Learn how to save more and spend less.
  • Purchase your primary residence – Pros and cons of owning vs. renting. The analysis chart shows the clear winner which will surprise you.
  • Distinguish good debt from bad debt---when borrowing makes sense. Analysis table proves that some debts are good.
  • Never take unnecessary risks. Don’t do anything stupid. This chapter shows that stupidity is the great equalizer in life.  Doing any of the things on the list may change your life or worse may end your life in the blink of an eye.
  • Stay away from rental properties. This chapter tells you why it is not worth being an absentee landlord.
  • Handle emergencies without an emergency fund. The analysis chart shows why you should not have an emergency fund. The figures will astound you. This chapter also shows the reader where to get cash for emergencies once you get rid of your emergency fund.
  • Never ever listen to Suze Orman that 401k loans are taxed twice. 401k loans are not taxed twice. This chapter proves it.
  • Plan for college. How will you pay for your children’s college education? Read the many different ideas in this chapter on how to increase your children’s chances of getting offers from good colleges and universities.  See the 9 simple steps you can take in chapter, “Planning for College”.
  • Increase your income. Make more money in your spare time with these ideas. When you read the money-making ideas in this chapter, you will scratch your head and say, “why didn’t I think of that?”
  • Create a document storage and retrieval system. So simple yet so effective. It will free up a lot of your limited living space.
  • Implement a stress-free personal time management system. This system will organize your day and free up plenty of your time for use at your leisure.
  • Store and safeguard passwords – Simple trick will help you create and remember strong passwords.
  • Maximize your Social Security benefits – In light of the elimination of “File and Suspend” and “Restricted Application” strategies, the chart shows claiming strategies for 1) Single never married, 2) currently married, 3) married at least 10 years, divorced at least 2 years, currently single, 4) divorced, has remarried and currently married, 5) widow/widower, 6) surviving divorced spouse, married at least 10 years, currently single or remarried after the age of 60.
  • Find the best places for retirement – Some of these retirement communities are surprising. Some viable locations have ½ the cost of living of most U.S. cities.
  • Pay for nursing home and long-term care. The cost of nursing home and long term care can wipe out your entire estate.  Read this chapter for solutions.
  • Qualify for Medicaid benefits for LTC. You do not have to spend down your savings.  This chapter explains many different ways other retirees have been dealing with the “spend down” dilemma.
  • Establish estate planning. How to protect your estate from estate tax and inheritance tax.
  • Enrich Your Life by Exploring the World – Travel as soon as you can while you are still young. This chapter discusses why the money you spend traveling and exploring the world is money well spent.
  • Stay Healthy and Fit as You Age – There are a few minor behavior modification changes that you can put into practice that will keep you healthy throughout your retirement years.

Ready to live a Rich, Happy, Healthy, Simple and Balanced Life?

Buy this book here!

Stock Market Investors, Fasten your Seatbelts

As of this writing, all of the major market averages have been declining significantly.  The Dow Jones Industrial Averages (DOW) is down 400 points, NASDAQ, 90 points and the S&P 500, 45 points. If you read the headlines right after Federal Reserve Board Chairman Ben Bernanke testified before the Senate Banking Committee today, July 21, 2010, you would think the world is coming to an end.  AP prints, “STOCKS FALL SHARPLY...” while Reuters states, “OUTLOOK UNUSUALLY UNCERTAIN….”  The fact is that a sluggish economy will benefit smart investors.  Smart investors do not act solely on emotion and fear because they are savvy enough to know that harbingers of gloom and doom who write about the stock market, the economy and investments know just as much as Mr. Adam Monk, the stock-picking monkey who reportedly made a lot of money for those who followed his picks. Gloom and doomers quickly reverse themselves the moment the wind changes direction.  It is like following the herd which is not hard to do.

The fact is that a sluggish economy will keep inflation and interest rates low making it easier for consumers to purchase.  Prices of goods especially large ticket items such as automobiles, home appliances, furniture and computers will be kept in check.  The price of real estate had been rolled back to a decade ago in many areas of the country.  This, coupled with low mortgage rates should encourage first time homebuyers and real estate investors alike to snap up bargains. A sluggish recovery will put more pressure on this administration to rethink its goal of increasing taxes.  A sluggish recovery would prove to this administration that taxing the rich and increasing entitlements is not the way to economic recovery and prosperity.  A sluggish recovery means the consumer is not spending as much, as expected in a typical expansion.  Hence, the consumer has more money to pay down his debt and to increase his savings.  He is poised to spend.  He may go out on a spending spree at the onset of any type of good news because in our culture, in a free market society, the consumer has an inherent need to keep up with the Joneses.  Another important factor is that many businesses are reporting record profits but are reluctant to invest and hire due to uncertainty about taxes, Europe’s debt crisis and more government regulations.  When the uncertainty goes away, the recovery may catch fire quickly and may even overheat.  The European bank stress test results to be disclosed this Friday, July 22 may add to more uncertainty which may cause investors to dump stocks. But the savvy investor can look beyond the horizon.

Geithner and Bernanke know what is going on with the economy and they have the power to change things. Bernanke told lawmakers today, "If the recovery seems to be faltering, we have to at least review our options, but no further action is planned for now because the economy is still growing”.  Geithner has the power to counsel President Obama with regard to taxes and he must have told Obama that the private sector does not like tax increases.  I predict that this administration will take appropriate action if signs point to another recession which President Obama will have to own.  He will not let this fragile recovery slide back into a recession because that would most likely seal his fate as a one-term president.  To me, fixing this economy is as simple as following what JFK, Reagan and Clinton did, and that was to reduce corporate and capital gains taxes.  Obama may be compelled to follow the same route if the economy appears to be sliding back into a recession and once again, that would be good for investors.

If this recovery continues to be sluggish but does not fall back into a recession, stock prices will continue to rise even though they may turn sideways some days and drop halfway to the floor other days.  Yes stocks will rise and fall but they will not sink to recession level prices unless there is another recession.  Economics 101 and plain common sense.

This article is not intended to provide financial advice.  Please consult your financial advisor before acting on any advice provided herein.

Any opinions and views expressed herein are the sole responsibility of the writer.

QE2 = Printing Money

Just as gay no longer means happy, QE2 no longer means Queen Elizabeth II.  Lately, the business world has been using the term QE2 a lot.  QE2 is short for the second round of the United States Federal Reserve’s (“Fed”) Quantitative Easing (“QE”).  This second round of QE is estimated to total $600 billion.  The first QE which was spaced out over one year, between 2008 and 2009 totaled almost $2 trillion.

Bloomberg News reports that the average person does not understand the function of the Federal Reserve.  Therefore, it is easy to conclude that QE is even less understood by the average person.  It is my goal to unravel the mystery of QE in this article.  To simplify, QE is another term for “printing money”.  The Fed, which is the Central Bank of the United States, regulates the amount of money in the economy by selling and buying bonds and by increasing and decreasing interest rates to member banks. The Fed has several ways of printing money.  It can issue Treasuries, i.e. notes, bills and bonds and it can also just credit itself as in this case of Quantitative Easing.  The Fed simply credited its balance sheet for the amount it needs to buy bonds from banks and other financial institutions.  The assets the Fed will buy with the money it credited itself are not limited to government bonds but are expanded to include mortgage backed securities and corporate bonds.  The Fed’s objective is to stimulate the economy by encouraging lending.  Reducing interest rates to almost nil has not worked to stimulate lending so this is the last resort for the Fed.  When the Fed buys idle assets such as treasury and corporate bonds, the banks and financial institutions such as Goldman Sachs receive liquid assets on their balance sheets in exchange for idle assets thus increasing the amount of cash at their disposal.  The Fed is hoping that the banks would ease up on lending and lend this new found cash to businesses and individuals. The assumption is that businesses that can borrow would use the money to increase capital investments, expand operations and hire more workers. For the banks to profit on QE, the newly found cash will have to be invested somewhere, i.e. by lending it to credit worthy borrowers or by putting the money in other investments such as into the stock market.  This is the main reason of the sudden surge in equity prices at Bernanke’s announcement of QE2. The Dow Jones Industrial Averages (DJIA) increased by 11% since August in anticipation of the announcement which happened in early November.

QE2, a.k.a. “printing money”, a.k.a. “expansion of the money supply” will reduce the value of the dollar.  This is basic Economics; The Law of Supply and Demand.  The dollar has been losing value against major currencies since the announcement of QE2.  Increasing the money supply will also increase inflation.  The word “inflation” is just as mysterious to most people as any economics term although it is one of the most overused words today.  To simplify what it means, imagine you are 1 of the 5 remaining finalists on the CBS show SURVIVOR.  You have not eaten any solid food in 5 days.  Jeff Probst, the host brings out a slice of pizza and gives each person $100.  He asks the players to bid an amount for the slice of pizza and the highest bidder wins.  Since there is only one slice, it is safe to say that each player would scramble to bid $100 for that single slice even though that slice normally costs only $2 in any fast food court, because once that slice of pizza is gone, it’s gone.  What if there are 6 or 7 slices?  What if there are 20 slices?  Then the bidders will not have to bid so much because there are more than enough slices to go around. Everyone can get a slice even with a low ball offer.  Let us get back to the single slice example but add quantitative easing to the scenario.  5 players have $100 each to buy up a single slice of pizza but you just happen to have a checkbook in your back pocket.  Every player bids $100 but you hand over $100 cash and a $100 check.  You get the slice of pizza.  That my friends is how QE works.  With your checkbook in hand, you are the Fed.

The Fed is hoping to stimulate the sluggish economy with its QE2 move but many economists think that the move may only spur inflation, not the growth needed to reduce the high rate of unemployment.  Officials of other countries including China, Brazil and the EU were quick to criticize Bernanke’s move arguing that QE2 only serves to promote currency wars.  After all, Japan’s decade long QE did not work, why should it work here? A cheap dollar is not good for foreign exporters of goods into the United States because their products become more expensive for Americans which causes higher inflation.  I am of the opinion that QE2 is not a good idea.  QE1 was necessary to restore stability to the banking system but I find this second round of QE as an arrogant and a largely political move.  Arrogant because Fed’s Chairman Bernanke knows that the dollar is the global reserve currency so the printing of money can be done without bankrupting the dollar.  Political because President Obama’s popularity will keep plunging unless the 9.6% unemployment rate is reduced.  The Fed’s QE2 move seems to be calculated to substantially reduce unemployment before the next presidential campaign goes into full swing.

Finally for investors, be cautious.  If you are invested in the stock market, watch the market carefully.  This newly printed money will be looking for a home.  Some of it will inevitably find its way into the stock market driving equity prices up.  The “feel good  effect” of seeing your investment or retirement account go up in value may indeed spur an increase in your consumption pattern contributing to the growth in GDP but this “feel good effect” is not a long term condition.  This intervention in an economy that is slowly but surely on the way to recovery is unjustified.  It may lead to the next bubble burst.

This article is not intended to provide financial advice.  Please consult your financial advisor before acting on any advice provided herein.

Any opinions and views expressed herein are the sole responsibility of the writer.

Sluggish Recovery, Good for Investors

If you read the headlines right after Federal Reserve Board Chairman Ben Bernanke testified before the Senate Banking Committee today, July 21, 2010, you would think the world is coming to an end.  AP prints, “STOCKS FALL SHARPLY….” while Reuters states, “OUTLOOK UNUSUALLY UNCERTAIN….”  The fact is that a sluggish economy will benefit smart investors.  Smart investors do not act solely on emotion and fear because they are savvy enough to know that harbingers of gloom and doom who write about the stock market, the economy and investments know just as much as Mr. Adam Monk, the stock-picking monkey who reportedly made a lot of money for those who followed his picks.  Harbingers of gloom and doom quickly reverse themselves the moment the wind changes direction.  It is like following the herd which is not hard to do.

The fact is that a sluggish economy will keep inflation and interest rates down making it easier for consumers to purchase.  Prices of goods especially large ticket items such as automobiles, home appliances, furniture and computers will be kept in check.  The price of real estate had been rolled back to a decade ago in many areas of the country.  This, coupled with low mortgage rates should encourage first time homebuyers and real estate investors alike to snap up bargains. A sluggish recovery will put more pressure on this administration to rethink its goal of increasing taxes.  A sluggish recovery would prove to this administration that taxing the rich and increasing entitlements is not the way to economic recovery and prosperity.  A sluggish recovery means the consumer is not spending as much as expected in a typical expansion.  Hence, the consumer has more money to pay down his debt and to increase his savings.  He is poised to spend.  He may go out on a spending spree at the onset of any type of good news because in our culture, in a free market society, the consumer has an intrinsic need to keep up with the Joneses.  Another important factor is that many businesses are reporting record profits but are reluctant to invest and hire due to uncertainty about taxes, Europe’s debt crisis and more government regulations.  When the uncertainty goes away, the recovery may catch fire quickly and may even overheat.  The European bank stress test results to be disclosed this Friday, July 23 may add to more uncertainty which may cause investors to dump stocks. But the savvy investor can look beyond the horizon.

Geithner and Bernanke know what is going on with the economy and they have the power to change things.  Bernanke told lawmakers today, "If the recovery seems to be faltering, we have to at least review our options but no further action is planned for now because the economy is still growing”.  Geithner has the power to counsel President Obama with regard to taxes and he must have told Obama that the private sector does not like tax increases.  I predict that this administration will take appropriate action if signs point to another recession which President Obama will have to own.  He will not let this fragile recovery slide back into a recession because that would most likely seal his fate as a one-term president.  To me, fixing this economy is as simple as following what JFK, Reagan and Clinton did, and that was to reduce corporate and capital gains taxes.  Obama may be compelled to follow the same route if the economy appears to be sliding back into a recession and once again, that would be good for investors.

If this recovery continues to be sluggish but does not fall back into a recession, stock prices will continue to rise even though they may turn sideways some days and drop halfway to the floor other days.  Yes stocks will rise and fall but they will not sink to recession level prices unless there is another recession.  Economics 101 and plain common sense.

This article is not intended to provide financial advice.  Please consult your financial advisor before acting on any advice provided herein.

Any opinions and views expressed herein are the sole responsibility of the writer.

What causes stock market fluctuations?

Ken Little who authored 12 books on investing and personal finance gives the following reasons for the drop in stock prices:  Interest rates, inflation, earnings, oil and energy prices, war and terrorism, crime and fraud and serious domestic political unrest.  With all due respect to Mr. Little, what he pointed out are the symptoms of the disease rather than the disease itself.  The disease which causes the stock market to tumble significantly is recession.  Yes the stock market will fall at the onset of various bad news such as an increase in the interest rates and energy prices, instability of the Euro Banking system and the high jobless rate.  But if these factors do not lead to a recession, the stock market should quickly recover and continue to rise. Sudden market fluctuation is significant for short-term traders but should not be for long term investors because the market always recovers after a recession.  It would be nice if you can predict the highs and lows of the market because you could have made a killing if you had sold in October 2007 when the Dow Jones Industrial Average hit 14,000 and bought again in March 2009 when it plunged to a low of 6,600.  Therefore, the Eurozone problem, high jobless rate, the downgrading of Spanish bonds, North and South Korean conflict, Israeli’s deadly raid and the BP oil spill do not worry me as much as decrease in retail sales, reduction in hiring, declining commodity prices, industrial production and housing starts.  The day-traders may drive down the stock market purely on investor sentiment and emotion, and we may yet see a DJIA of 9,000 in just a few weeks, but it defies logic for a downward trend to continue if all leading economic indicators are pointing upwards.  This is all intricately connected because if stocks do not recover quickly, and we get into a prolonged bear market, consumer confidence may deteriorate resulting in reduced consumer spending.   Again, I do not see a protracted bear market unless we are heading for another recession.

We must go back to basics to enable us to assess where we are now in the economic recovery.  Recessions are a normal part of a business cycle.  Recession comes from the word “recess” which most of us know is the suspension of whatever we are doing in order to have fun and relaxation.  As in “let the children play during recess”.  However, in business lingo recession is a word that is feared by most people because it can be defined as the suspension of consumer spending or to put in milder terms, an intermission from spending.  In economic terms recession is often referred to as a “contraction” of the economy and the recovery which follows is commonly called an economic expansion.  Recession is feared by most people because it results in the reduction of wealth.

Historically, recessions are brief with this last one, dubbed “the great recession” being the most severe since the great depression.  It is the consensus of many economists that this last recession lasted 18 months.  Now that we know recessions are merely temporary suspension of consumer spending, we can be sure that economic growth will follow shortly unless a catastrophic event ensues, such as the collapse of the banking system leading to a depression, another bubble burst or some kind of a natural disaster.  It is the opinion of many economists that “the Great Recession” has not been followed by a “Great Recovery” because taxes and government spending have not been reduced by this administration.  Historically, tax cuts have always spurred economic growth.

But where are we now in the course of this economic expansion after the great recession?  I have a more optimistic outlook and I am hoping that we are halfway back up a “V” shape recovery and not in a “U” shape recovery.  The European Debt Crisis and the high unemployment rate alone should not cause the stock market to plunge. First, the European Debt Crisis has been alleviated by the commitment of the European Union Central Bank and the IMF (International Monetary Fund) to pledge almost $1 trillion in bail out money (Le Tarpe) for ailing Eurozone countries such as Greece, Spain and Portugal.  Le Tarpe has a great potential for success if used judiciously in buying junk bonds of troubled countries but The European Central Bank must continue to demand austerity measures from leaders of these countries.  Although Greece’s default is imminent, Le Tarpe should temper investors’ sentiment since the bail out money should tide Greece over for a year or two.  The stock market plunge this month, the worst May for stocks since 1940 was caused by investors’ panic and uncertainty about Le Tarpe.

Second, the high jobless rate of 10% is not enough to derail the recovery.  Even if the entire unemployed population stops spending, there is still the remaining 90% of the working population, which according to statistics, continues to consume.  If consumer spending is lower than forecast in May, that would worry me and I am sure it would worry stock market investors.  Despite the high jobless rate the private sector is still reporting robust increase in hiring through the end of April.  What would cause the stock market to plunge some more is bad economic news that could signal another recession.  And going back to basics again—what will erode consumer confidence and stop the consumer from spending?  For starters:  Reduction of income; job insecurity; debt increase due to higher interest rates; inflation; diminution of assets, of investments and other tangible property such as real estate.

This article is not intended to provide financial advice.  Please consult your financial advisor before acting on any advice provided herein.

Any opinions and views expressed herein are the sole responsibility of the writer.

PIIGS: Too Big to Fail

The largest economy in the world, The United States of Europe, officially called the European Union is facing a financial crisis that could weigh down our own economic recovery.  The bears on Wall Street have outnumbered the bulls, focusing on the economic upheaval in Europe instead of the good economic news here at home.  Economic indicators here in the U.S. are still pointing upwards indicating the continuation of our recovery from the great recession.  Housing starts rose an estimated 5.8% in April to an annual rate of 672,000; retail sales were up 0.4% beating expectations; industrial production moved higher; 1st quarter earnings of 75% of companies in the S&P 500 have exceeded expectation and most notably, the private sector added 32,000 jobs according to ADP.  Various economists differ in their projection of job growth this year, from a low of 300,000 to a high of 1 million private sector jobs.  I believe that the extension of unemployment and health benefits is a disincentive for many unemployed workers to seek work, thereby contributing to the high unemployment rate which has been hovering around 10%.

The malaise in Europe is hard to ignore because our global economies are all inter-connected.  The failure of any of the EU’s most ailing economies, the PIIGS which is an acronym for Portugal, Ireland, Italy, Greece and Spain could send a tsunami of global economic woe: a financial meltdown much worse than the sub-prime mortgage crisis of 2008.  The PIIGS are less affluent countries than their northern neighbors such as Germany and France and there is such a disparity of wealth between member nations.  The IMF/European Debt Bailout of 750 billion Euros, which has been nicknamed “Le TARP”, pacified the market early last week so the bulls started running again driving up the Dow Jones Industrial Averages (DJIA) 500 points from the previous week’s low of 10,380.  As reality sank in, investors became jittery and gravitated towards tangible investments such as gold, driving up its price to $1220 an ounce.

Reality is that Greece will eventually default.  It is my educated opinion based on facts.  Greece is the second most corrupt developed country in the world according to Forbes Magazine.  It is easy to bribe Government officials.  It is a social democracy, a welfare state with generous entitlement programs which includes early retirement, state pensions, and huge bonuses for public employees and a generous cradle to grave health care system.   The wealthiest members of society, shipping magnates like Onassis, lawyers, doctors and other highly paid professionals have traditionally avoided paying direct taxes.  I do not think the Greek populace can swallow the austerity measures being currently debated by the Greek parliament.  Public anger in Greece will continue running at explosive levels. Why should the Greeks agree to do away with their entitlements which have been their way of life for such a long time?  Besides, most Greeks do not blame themselves nor their government for their predicament.  Rather, many Greeks would argue that the U.S. caused the financial meltdown leading to the severe world wide recession and banking crisis. Greece’s accumulated deficit is running 113% of GDP.  They have ran out of money to pay for their bonds that are coming due.  The solution is to issue more long term bonds to raise money but their government bonds have been downgraded making it impossible to sell them to continue to finance deficit spending.

Austerity measures being proposed include the freezing of government pay till 2014; dispensing with the 2-month bonus for public employees; increasing of the retirement age from 61 to 63; increasing VAT (Value Added Tax) from 19 to 23%.  It is reported that 1/3 of the Le TARP money or 250 Euros will come from the International Monetary Fund (IMF) out of which 10 billion Euros is the contribution of the U.S.

Volcker’s statement last week that the Euro may break up, points to the core of the problem of the European Union. The Euro has gone down from its high of $1.50 per Euro last November to a low of $1.24 this week.   The problem is that on one hand, member countries have become financially responsible for each other as magnified by this crisis.  On the other hand, member countries have very little influence on how another country is governed because each member is an indivisibly sovereign state. At least if Greece goes back to its own currency, the drachma, it will suffer on its own for its fiscal irresponsibility.  This current crisis is testing the EU if it can stay united and if the Euro will be preserved.

The 750 billion Euros may not be enough to rescue Greece.  It certainly will not be enough to bail out other PIIGS in case any of them defaults on their external debts.  If one falls, it would be followed by another and another and another.  And this is what worries me and makes me bearish on the market despite the good economic reports in this country.

This article is not intended to provide financial advice.  Please consult your financial advisor before acting on any advice provided herein.

Any opinions and views expressed herein are the sole responsibility of the writer.

BUSH-OBAMA Recession, No Different from the Rest

Many economists, prognosticators, financial pundits, stock brokers and financial planners have committed a big blunder or a big hoax by proclaiming this recession different from the rest and the worst since the great depression.  The fact is I believe this recession is no different from the previous post war recessions.  Those who share my belief have made a lot of money in the stock market during this recession.  In the first quarter of this year, the majority of financial pundits I watched on TV advised investors, some of whom have already lost 50% of their savings at that time,  “to stay out of the market” unless they have 10 or more years to go before retirement.  Who knows how many took their advice and got out of the market, thereby missing the bull market that started in March and is still going strong as of this minute.   In January and February, many financial experts were predicting the Dow Jones Averages to go down to 5,000.  In “DIDOSPIN-11,000 DOW, August 7, 2009” when DJIA was 9,370, I predicted the Dow to climb to 10,000 before the end of the year and to 11,000 before the end of next year.  It already reached 10,000 last week. Most of the financial experts I watched on the Lou Dobbs and Larry Kudlow shows collectively stated that “it may take 10 years to recover losses in retirement plans…”   Shame on them for being so incompetent or for perpetrating a hoax!   Those investors who stayed put have already gained back most of what they have lost and I believe this bull market still has legs before the next significant market correction.

In “DIDOSPIN- Obama’s Recession, March 8, 2009”, I said “Recessions are part of a normal economic cycle.  Soon consumers will come back and resume buying necessities such as refrigerators, TVs, computers, furniture, cars…”  How true!  A lower than expected contraction in GDP at 1% in the 2nd quarter is believed to have been followed by a small positive increase in GDP in the 3rd quarter, although official stats have not yet been released.  I predicted a much bigger increase in GDP the 4th quarter.  The increase in GDP is an indication of an increase in consumer spending.  One thing to remember is that GDP stats do no even take into consideration business to business consumption, only the consumption of the ultimate consumer or end-user.  This is something that many people are not aware of. 

I secretly scoffed at my boss in January when he told me in a panic that we must dig in our heels in this “worst ever recession”.  I told him, “We’ve seen this before, the last one in 2001….” “No, no, no”, he adamantly replied, “this is different”.  How wrong he was!  The only difference between this recession and the previous ones is its nickname.  This one will probably be known by several nicknames such as “Sub prime Mortgage Crisis, aka Housing Bubble Burst, aka Auto Industry Crisis Recession”.  The various nicknames of the 3 previous recessions according to Bloomberg News were:  Dot-Com Bubble Burst – 2000 to 2001; S&L Crisis, 1990 to 1991 and the Energy Crisis Recession, 1981 to 1982.

I concede that this will prove to be the longest recession since the Great Depression.  But its severity and misery index pales in comparison to the Carter-Reagan recession.  According to Bloomberg News, during the 1981-1982 recession, the national unemployment rate was 10.8% at its highest; inflation was 14% and the prime rate went up to 20.5%.  In this current recession, inflation is almost non-existent and the prime rate is the lowest it has been in 50 years (source:  http://www.wsjprimerate.us/wall_street_journal_prime_rate_history.htm).

Obama predicted the unemployment rate will continue to increase and will exceed 10% before the year is over but I will go with my prediction in “DIDOSPIN- Recession Over, June 27, 2009” that it would peak at 9.8%.  This means that more than 90% of the working population is employed and is poised to go back into the “buying mode”. It is a cycle and consumers eventually buy what they need or want. The stock market rally is a big factor in consumer spending.  If a consumer sees his portfolio going up in value, he will have more confidence spending his discretionary income as opposed to saving it for a rainy day.  Fortunately, the behavior of the stock market follows a free market pattern that is predictable.  The stock market does not like government intervention in the free market economy.  It does not like redistribution of wealth; tax increases; government take over of health care, the banking system and other private industries; cap and trade; interest hikes and increase in deficits.  One of the reasons the market is doing so well is that Obamacare and Cap and Trade appear to be in trouble.  There are different versions of Obamacare bills that are still under discussion in the congressional committees, and although Cap and Trade bill passed the house, it is not expected to pass the senate.  If these two bills regain traction, it is almost guaranteed that the market will take a plunge, perhaps causing a double dip recession.

This article is not intended to provide financial advice.  Please consult your financial advisor before acting on any advice provided herein.

Any opinions and views expressed herein are the sole responsibility of the writer.