Here are some positive economic nuggets:
This week it was reported that home sales were up and jobless claims were down.
Microsoft saw higher revenues from corporations increasing spending on computers.
Amazon saw profits surge in the first quarter as consumers felt comfortable buying online. Reinforcing this was American Express noting that it saw a big jump in cardholder’s spending in the first quarter.
Restaurants and hotels are beginning to see customers return. This is especially good for hotels because this is a sign that business travelers are back, which means business activity is picking up and/or these companies are feeling more confident.
The U.S. Commerce Dept. reported that, excluding transportation items, durable goods orders (i.e., large manufactured goods) rose last month, and it was the biggest increase since the recession began – manufacturing in the U.S. is getting back on its feet.
Separately, it was noted in the Wall Street Journal this week that several software companies (e.g., SAP AG, Adobe Systems and Salesforce.com) raised money via bond offerings for the first time in their histories. The belief is these companies and others may be raising funds for acquisitions. If this is true and mergers and acquisitions could begin heating up, then the stock market will continue to have some wind beneath its wings.
No doubt about it; the economic and stock market trends are both upward, and it is nice to see the current bull market help resurrect account values. However, I don’t want the same economic and stock market hangover that occurred the three years following 1999. Moderation is key at this junction – let’s not get too euphoric and throw caution to the wind when it comes one’s investments.
Governments are no different than individuals
The following is economic fact and not political statements, as it is my goal to offer some information on how these events, and what is the impact on you. Honestly, your retirement nest egg and savings will be directly and adversely impacted if the U.S. and other governments continue their business as usual approach. Now I realize I have not touched on the accusations being leveled at Goldman Sachs by the U.S. Securities and Exchange Commission. I (from all the articles I’ve read and videos I watch on this subject) and many others are still trying to understand what actually occurred and who knew what and when. Thus far it appears that it was a very unethical business transaction by Goldman Sachs, extremely poor business decisions by ACA and other investors or a combination of both. Maybe these exotic derivatives are too complex even for the professionals trading in them. The old adage “Keep it Simple” is the best advice.
Let me start off by saying that I have been to Europe and thoroughly enjoyed the experience. However, my perspective as a tourist is much different from my perspective as an investor. As such, I don’t want to be accused of being biased or jaded in my following opinion.
Call it the “domino effect.” The European Union (EU) has a major problem and it is basically this; governments are no different than individuals. When an individual spends beyond their means, won’t curtail it and then starts asking for hand outs, they become very unpopular. Remember the old saying, “you’re judged by the company you keep.” Well that is exactly what is occurring. Greece is in extreme financial trouble. For example, just this week the two-year Greek government bond is yielding over 10%. That kind of yield on a short-term bond is more akin to speculative junk, not a government-backed bond. However, this is what happens when a country’s debt is so large that investors don’t believe it will be repaid.
As such, other EU members like Spain and Portugal are seeing investors painting them with a similar brush. This is resulting in these governments having to offer much higher yields on their bonds to get investors to buy them. All this does is compound and accelerate these countries deficit problems. Just like an individual with a bad credit score, you are going to pay higher interest rates and receive less favorable terms than someone with good credit.
Thus, Greece’s problems could be like dominoes toppling over and Spain and Portugal are next. The only way to insulate yourself from the problem is to make sure your government’s financial house is strong and you’re not taking on debt like a sinking ship.
Greece’s debt crisis is the result of out of control government spending, and investors losing faith in its ability to pay back its debt. Also, the European Union is having a difficult time creating a bailout for Greece and then not coming to the rescue to other countries like Portugal, Italy, Ireland and Spain who are also struggling.
For a very insightful, but short video on this issue, please click the following link:
If you want to see firsthand how high government deficits can impact you, let’s consider the following example.
Assume you are a Greek citizen, and your older brother bought a home three years ago for $250,000 and put 20% down. At that time, he was able to get a 5.50% 30-year mortgage. Now, in April of 2010, you want to buy a similar $250,000 home and are also able to put 20% down. However, due to your government’s debt crisis, interest rates are considerably higher. Thus, your 30-year mortgage rate is 10.50% and results in you paying an additional 5% or $693/month on your $200,000 mortgage.
That extra $693/month of interest payments produces no economic benefit for anyone. Also, combine it with higher income taxes and you now find that the extra money you counted on for living expenses, savings and discretionary spending is gone. So instead of having an extra $1,000/month, your family is living paycheck to paycheck with no cushion.
Sadly, I don’t believe that some of the members of the EU truly don’t understand their precarious situation, care or believe they are in financial peril. If they did, then why would Antonio Tajani, EU Commissioner for Enterprise and Industry, be recommending that taxpayers subsidize (i.e., pay for) travel for some of its citizens. He was quoted in the April 18, 2010 UK Sunday Times as saying, “Travelling for tourism today is a right. The way we spend our holidays is a formidable indicator of our quality of life.” Also, he wants to “affirm the rights of passengers” and to ensure people’s “right to be tourists.”
In my opinion, this guy is delusional and not worthy of any governmental office! For more on this craziness, please click the following links.
http://online.wsj.com/article/SB20001424052748704448304575195820988457124.html#printMode
http://www.timesonline.co.uk/tol/news/world/europe/article7100943.ece
We Americans need to be keenly aware of what is occurring in Greece currently, because we could face the same dilemma here at home if our government debt reaches a level that investors believe cannot be repaid. An ever increasing national debt will lead to extremely high interest rates, a devalued currency and higher taxes. None of these affects is pleasant, and all three combined can result in a stagnant economy, above average unemployment, lower investment returns and standard of living for all of us.
I wouldn’t have believed it if I had not read it
The Wall Street Journal reported this week that home builders are fighting to acquire land lots in preparation for ramping up home construction. Ironically, land prices are being bid up, while we are still seeing record foreclosure rates. This seems even more surprising since some homebuilders were selling land for pennies on the dollar and taking huge losses in the last two years during the housing bust. One California real estate professional called it “an absolute land rush.” To me it is unbelievable how quickly the tide of opinion can turn. These builders could be making very astute business moves, or again it could be the same herd mentality pushing prices back that was selling lots at fire-sale prices previously.
Quotes
“An education relieves you of the burden of having to believe everything you are told.”
Robert Leamnson, biology professor
“The only people you should try to get even with are those who have helped you.”
Author unknown
“A prudent person profits from personal experience, a wise one from the experience of others.”
Dr. Joseph Collins, American neurologist
“The greatest obstacle to discovery is not ignorance – it is the illusion knowledge.”
Daniel J. Boorstin, historian and writer
Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074
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