“You can’t polish a turd.”  This is just one of the pieces of sage advice I received from her.  To test this rural myth, I applied for and received a $250,000 federal grant to conduct a study.  Based upon the advancement of technology, I believe it can be done, and I am sure you are anxious to hear the results of the study. 

First, I apologize if you find any of my comments crass or tactless.  However, I am not going to candy coat it.  History shows that the world has looked to the U.S. as an economic leader and innovator.  We take ideas and through hard work, imagination and innovation we end up producing goods and services for ourselves and others around the world.  In doing so, we create jobs which often result in increased wages, personal spending, corporate profits and income taxes.  When our economy stumbles or even fumbles along, it results in a tremendous amount of financial fear around the globe.  It’s no different than going into the championship football game without your star quarterback.  He’s been the leader and driver of the team all year.  Now, he’s out with an injury and you’re relying on your backup quarterback, who’s had minimal, if any playing time, to lead the charge.  Quite unsettling to say the least!    

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Gas prices are down, core inflation is up and jobless claims rose more than expected.  In addition, the European Union is struggling to come up with some economic solution to cover the outstanding debt of several of its members, while imposing some kind of new agency that would have budgetary oversight of all members.  The goal is to make sure all members handle their respective nation’s finances responsibly, not overspend, and then turn to the other members for a bailout.  Currently, this appears to be a very tough task.  Unfortunately, all this uncertainty is taking a toll on business and consumer confidence and resulting in global economic growth forecasts being revised downward. 

Along these lines, Toan and I met with two mutual fund representatives this week regarding what their respective fund managers’ outlooks are for the economy and what changes they made during the recent spate of market volatility. 

Both mutual fund management groups, one growth-oriented (i.e., stocks & convertible bonds) and the other bond-oriented, noted that they believe that the U.S. economy may slog along for the next several years before really breaking loose and incurring strong economic activity.  In addition, both management teams had made portfolio adjustments. 

The growth-oriented group became more defensive prior to the U.S. debt ceiling/budget impasse, but has taken a more risk-oriented approached in the last week or so and actually did some buying during the recent downturn.  The bond-oriented group shortened durations, which positions the portfolio so that it will be less adversely impacted once interest rates begin to rise, even though they don’t expect that to be the case in the U.S. anytime soon.  In addition, this management group noted as well that the recent market volatility presented buying opportunities.  They also noted that they continue to have success earning high total returns in some of their international bond funds via emerging market bonds, which in many cases offer better yields, appreciation and ratings than some of the more developed countries like the U.S., Japan, etc.  Read more

As soon as the ink dried on the newly signed debt ceiling legislation, world markets began to sober up to the economic environment and realized that there is still a pretty big mess to clean up. 

Just a short recap of the debt ceiling crisis: 

• The debt ceiling was reached in May at $14.29 trillion, but government could still function normally until August 2nd.  That is when it would run out of funds and default on its bond obligations, unless the debt borrowing ceiling is raised. 
• On August  2^nd the  debt ceiling was raised by up to $2.4 trillion to keep the government running into 2013.  In addition, at least $2.4 trillion in spending caps (reductions) are to take place over ten years. 

The U.S. Government and the word default should never be used in the same sentence.  The U.S. dollar is the gold standard of currencies and global trade is denominated in the dollar.  If the U.S. were allowed to default, even a paper default (like this one) would send shockwaves through the global markets.  A U.S. default would bring to question the very stability of the its dollar, that the AAA rated US bond (bonds that are not suppose to default) have defaulted.  But alas, we have stepped back from the brink, as most analysts had predicted.  Read more

The current debt ceiling debate is stealing the headlines and creating an opportunity for sensational commentary from almost every pundit under the sun.  I, as well as you, have read and probably heard a plethora of outcomes as to what might occur if and/or when this situation is resolved.  Unfortunately, I believe it has caused some stress and concern for investors, especially retirees.  As such, I am going to tell you what I think, not about the debate and what should be done, but what options you may want to consider.

If you seriously believe that the U.S. is going to default and it could be the end of our financial system as we know it, then I recommend army rations, ammunition and canned goods.  By taking these steps, you may be able to rise from the economic ashes and provide food, shelter and protection for your immediate family and maybe, just maybe a few of your closest relatives. 

Now as ridiculous as this may seem, it seems quite rational in response to some of the extremist comments I have read and heard.  On the other hand, you can try and tune out the talking heads and realize that, yes, it is important that U.S. and other political leaders get a handle on their governments’ finances.  That being said, every year there is some major headline grabbing event that takes place, expected or not, and we adjust to it and life goes on.  Honestly, no matter what occurs on, before, or after the August 2^nd deadline, there will still be a line of cars snaking around McDonalds at lunch time, caffeine zombies dragging themselves to Starbucks for their morning cure, moms fighting with their kids over the candy display at the checkout counter at the grocery store, and Apple continuing its march toward world domination via its cadre of i-devices. 

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Global stock markets have been reacting very positively in the near term, and quite honestly, have taken me by surprise.  Historically, markets have climbed “a wall of worry” and advanced in the face of bad news.  As such, the recent market run ups may be an indication that: 

• There is wide spread belief that the bandage placed on the Greek financial mess will hold for awhile. 
• The leaders in D.C. will find common ground on raising the debt ceiling.  However, austerity is coming to America; so get ready for some cuts. 
• The labor markets are improving evidenced by today’s data from payrolls processor ADP showing U.S. private hiring increased by 157,000 in June.  This is well above the expected 68,000, bouncing back from a surprise slump the month before. 

Several economists, CEOs and politicians have advocated that one the best moves to fix the U.S. Government’s budget problem would be to simplify the tax system.  Get rid of the majority of the loopholes, while lowering overall tax rates for corporations.  This will create a much greater base of income to pull taxes from, resulting in higher tax revenues over time and possibly funds being repatriated back to the U.S. from overseas.  As Warren Buffett noted in a CNBC interview today, to really address the U.S. deficit problem requires three things: a lot of will, leadership and outrage.  I am in full agreement, but as to if and when this may occur I am not sure.  All I can say is that when it does, we will see some market volatility. 

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The stock market is declining on news that new claims for unemployment benefits rose more than expected last week, suggesting little improvement in the labor market this month after employment stumbled in May.  In addition, the Federal Reserve Chairman’s speech and question and answer session yesterday (see below) did not help matters either. 

The Greeks don’t want to take their economic medicine.  The country’s largest labor union called for a 48-hour general strike for June 28 and 29 to protest the bills and press demands for a change in policy by the country’s government.  As part of protests against the bills, Greeks faced more power cuts today as workers at the electricity company continued 48-hour rolling strikes, objecting to the privatization of the power company. 

Bottom line: some of the Greek citizenry realizes that their strikes and sometimes violent demonstrations can cause real damage to their economy and global stock markets in the near term.  I personally believe the Greek government, EU and IMF need to take these bullies to the woodshed and come up with a feasible long-term solution.  Caving into these protests only delays the inevitable, by rewarding bad behavior and unsustainable benefits.  Putting out the Greek economic fire will be a huge help for global stock markets.  However, how to do it and get it approved by all involved – well that’s a different story. 

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Financially Savvy Young Adults Event
Saturday July 9^th  9:30AM to 12 noon
Deer Creek Golf Club
7000 W 133^rd St.
Overland Park, KS  66209

This event is geared for young adults ages 17-24 who want to get started on a path for financial success.  We will demonstrate practical, easy and fun ways to make, save and grow your money that can be used into college and beyond.

Examples of topics covered are:

-  Budgeting and monitoring spending.
-  Implications of abusing debit and credit cards.
-  Student loans.  How to handle them responsibly.
-  Saving versus investing.  How and when to get started.
-  Credit score.  What it is and how can it affect me?
-  Things to consider when planning a major purchase.
-  And other important life lessons.

Those planning to attend are welcome to invite friends or family members who fall within the age range.  Space is limited, so anyone interested in attending should call the office at (913) 897-2074 by July 1st.  We look forward to this being a great educational event for all those attending. 

It’s a muddle through summer 

Various economic issues are playing tug of war with U.S. and global economies and stock markets.  Bottom line, raw material prices are up, economic growth has cooled a little bit and Greece’s debt problem continues to be a thorn in everyone’s side.  The following are some other economic and market issues that may be getting investors’ attention in the near term:

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I know that I am reaching middle age when I begin to yearn for the good ole days.  Regarding this, I find some current trends disturbing, and I am not talking about unemployment figures, the U.S. deficit or stock market.  What I am referring to is the lack of integrity in our society 

Webster’s defines integrity as: 

• firm adherence to a code of especially moral or artistic values : incorruptibility
• an unimpaired condition : soundness
• the quality or state of being complete or undivided : completeness 

The following are just some examples of our leaders or popular celebrities falling short of what I believe should be expected of them. 

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Economic news causes the market to pause

This week it was reported that:

• The factory sector and hiring both declined in the U.S. in May.  The Labor Department reported that employers added only 54,000 new jobs in May, the fewest in eight months.  The unemployment rate also inched up to 9.1 percent from 9 percent.  Private companies hired only 83,000 new workers, the fewest in nearly a year.
• Moody’s Investor Service (a ratings agency) said it was reviewing the ratings of Bank of America Corp., Citigroup Inc., and Wells Fargo & Co. for possible downgrades.  The rating agency gives the three banks fairly strong investment-grade credit ratings based upon the assumption that the federal government would prevent them from failing in a crisis.   Moody’s said Thursday that this “too big to fail” presumption may no longer be true.
• In addition, Moody’s Investors Service warned that it might review the U.S. Government’s Aaa debt rating for a possible downgrade as early as next month if there is no progress toward a deal in Washington to increase the $14.294 trillion federal borrowing limit and cut deficits.
• Goldman Sachs Group Inc. was subpoenaed by the Manhattan District Attorney’s office over the investment bank’s activities leading up to the financial crisis, a person familiar with the matter told The Associated Press.  In April of this year the U.S. Senate released a 639-page Senate report that showed Goldman had steered investors toward mortgage securities it knew would likely fail.  The report, which was the result of a Senate panel investigation of the financial crisis, found that Goldman marketed four sets of complex mortgage securities to banks and other investors.  The report said the firm failed to tell the banks and investors that the securities were very risky, secretly bet against the investors’ positions and deceived them about its own positions.  The report concluded this was part of Goldman’s effort to shift risk from its balance sheet to those of investors’.

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The U. S. Commerce Department announced today that after-tax corporate profits for the first quarter of this year fell at a rate of 0.9 percent, after rising at a 3.3 percent pace in the fourth quarter of last year. Separately, the Labor Department noted that unemployment claims last week rose.

Many economists are calling for a rebound in the second half of the year for the U.S. economy. I certainly welcome this; however, I just spoke with a local veterinarian yesterday and he noted that his business is starting to slow down for the first time in the last several years. Basically, it is his belief that the recession was not nearly as impactful on individuals’ spending habits, especially on their pets, as the recent high gasoline prices. He may be right. Higher gasoline and grocery prices (see Coffee drinkers and chocolate lovers beware), may put a damper on economic growth, which would make for a lackluster stock market. I hope I am wrong, but it is something to consider.

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