- Computer chip maker Intel reported a huge rebound in profits and sales for the last quarter of 2009. This is a good sign for technology related companies. Individuals and corporations are spending money on computers and related technology equipment and software. It is positive to see consumer and corporate confidence actually result in new purchases.
- Separate of this, JP Morgan (the second largest bank in the U.S.) reported better than expected earnings this morning. JPMorgan also warned investors today that losses on mortgages and other loans have not yet peaked. Also, the weakness in JPMorgan’s consumer business is hurting other financial stocks.
- Bank of America and Capital One Financial Corp, two large credit card issuers, reported jumps in U.S. credit card charge-offs for December of last year, suggesting consumers were stressed through the holiday shopping season. However, delinquency rates slipped at those companies as well as at Discover Financial Services. Customers delinquent on their credit card payments are declining, but the banks are realizing that some of these credit card debts will never be collected and they are writing / charging them off.
- A disappointing report on consumer sentiment is also hitting stocks. The preliminary Reuters/University of Michigan most recent monthly consumer sentiment index has come in weaker than economists had forecast.
How do the above items affect my investments
Basically, the stock market has had a nice run, but it needs continued positive economic news to go higher long-term. In the short-term (i.e., six – twelve months) we should see more improvement for the U.S. and foreign economies. However, we are not completely out of the woods. As a matter of fact, a CNBC article earlier this week purported that a potential wave of new regulation and higher taxes could be scaring many businesses from hiring, which will drag out a rebound in employment. I participate in a CEO roundtable and bank advisory board. Between the two groups I have interaction with approximately 15 – 20 local CEOs / business owners. Across the board, it is almost unanimous that new regulation (and the associated costs) along with potentially higher taxes will negatively impact their businesses.
For example, when a large corporation faces these same issues, it will turn to its vendors, in many cases medium to smaller size businesses and ask them to reduce their fees / costs. The small businesses either acquiesce or possibly lose the client. In either case, the small businesses must find a way to cut costs. Many times this means new equipment purchases, plant expansions, and new hires are taken off the table. In addition, existing employees incur no wage or benefit increases and even decreases.
The net of all this is a reduction in company profits and less take home pay – especially for the rank and file workers. Less pay means less money to spend and invest, which is just the opposite of what you want for a strong stock market and economy.
I am not a gloom and doomer; however, human emotion overrides everything else. As such, if upon analyzing the future economic landscape CEOs and business owners see tougher times ahead, then they will pull in their horns. Some of this is good and results in prudent and necessary cost costing and improved efficiencies, especially through innovation. But that can only go so far. Once they have reached their limits, then companies will have lower profits, which results in less dividends for shareholders. Also, employees will see stagnant if not declining wages, which diminishes their ability to spend and invest in their 401(k) and retirement plans.
In addition, increasing taxes and decreasing spending is now the new mantra for all levels of government. Thus, we may all see increased taxes (e.g., sales tax, personal property, real estate, city, state, federal, etc.) and fewer services provided or services that were free are now being charged for. Other than state and federal income taxes, all the others are stealth taxes that politicians don’t talk about and won’t immediately jump out on your tax return.
In addition, more and more respected professionals are warning of the implications of an ever-increasing U.S. deficit. We all know this has been an ongoing problem, and most politicians are too worried about re-election to adequately address it. Thus, we are faced with a situation that individuals and the government need to deleverage (i.e. reduce their debts), and the vast majority of those working individuals need to increase their savings for retirement at the same time.
The housing / credit crisis didn’t happen overnight. An ultimate solutions and recovery will take time. That being said, it is not the end of the world. All it means is that we need to adjust our expectations. The S&P 500 averaged 18.20% per year in the 1990s and -0.95% per year in 2000s. I don’t expect it, nor our portfolios, to experience either of these extremes in the next decade. We should see moderate returns that may cause us and many Americans to become more modest in our wants and lifestyles.
The U.S. is not becoming a third-world nation; however, we are becoming a more humbled nation that needs its citizens and leaders to make tough, sensible choices for the benefit of all and especially our kids and grandkids. In general, if a policy negatively impacts a company’s profitability and bottom-line, then it is going to negatively impact your personal finances – it all trickles down.
Quotes
“You gain strength, courage, and confidence by every experience in which you stop to look fear in the face.”
Eleanor Roosevelt, First Lady
“Mistakes are part of the dues one pays for a full life.”
Sophia Loren, actress
“The only thing that ever sat its way to success was a hen.”
Sarah Brown, author
“The world has a way of giving what is demanded of it. If you are frightened and look for failure and poverty, you will get them, no matter how hard you may try to succeed. Lack of faith in yourself, in what life will do for you, cuts you off from the good things of the world. Expect victory, and you make victory.”
Preston Bradley, minister
Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074
The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.
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