Peter Orszag wrote a column in the Financial Times last week. (Orszag was the Director of the Office of Management and Budget under President Obama.) His closing paragraph: “The bottom line is that there may well be U.S. public debt tremors this year, both during federal debate over raising the debt ceiling and with at least a limited number of crises in local and city governments. The bigger problem, though, lies beyond 2011, as the unsustainability of the federal government’s fiscal trajectory becomes increasingly clear. I hope it does not ultimately require a crisis to restore fiscal sustainability at the federal level, but I fear it will.”
In my opinion, the US Government has been spending money on their “credit card” thinking it will never receive the credit card bill in the mail. But, it’s coming. And, I am not the only observer with this opinion. Peter Orszag is fearful too.
Category Archives: Uncategorized
The Domino Theory – 2011 Version
Tunisia’s government has been toppled. Is it the first domino to fall? What if it were followed by Egypt, then Jordan, then Yemen and finally, the biggest of all- Saudi Arabia? And, within the new governments, what if the bad guys controlled? Would the flow of oil to the West be threatened? What would be the effect on oil prices? Interestingly, I studied a somewhat similar scenario several years ago involving a theoretical Iran/Israeli conflict scenario and the closing of the Strait of Hormuz. I developed a list of energy companies who source their oil and natural gas outside the Persian Gulf and whose share price would be lifted if the flow of oil from the Persian Gulf were threatened. This week, I intend to dust off that analysis and report on it to you in the next Weekly Commentary. Send me an email if you want this info as soon as it is available.
Real-Life Situations
Last year I sold some stock I inherited from my father. How do I figure out the gain or loss because I did not pay anything for it? Answer: In most cases, the tax basis of inherited property — that’s the value from which you will figure gain or loss when you sell — is “stepped up” to the value on the day the previous owner dies. Tax on all appreciation during his lifetime is forgiven.
Question:
Motivational Quote of the Week
– Author Unknown
“We are continually faced by great opportunities brilliantly disguised as insoluble problems.”
Personal Notes
Bring on the spring before my mind forgets how to swing a golf club! I hope that Phil, the groundhog, does not see his shadow Tuesday on top of Gobblers knob, outside of Punxsutawney.
This snow reminds me of my childhood in the late 50’s. The western PA winters were severe with plenty of heavy snow-falls. And, the sky always seemed like it was snowing or going to snow. Below zero temps were not uncommon. But, we survived. Just like this winter – somehow.
UPDATE: Phil says “Early Spring”!
The Economy
Positives 1) Q4 Real final sales solid 1) Real and Nominal GDP below forecasts, low deflator makes Real look better
The economy continues to give us mixed signals. Here is a detailed list of these signals:
2) Consumer confidence jumps, answers to job market questions improve
3) Pending home sales and new home sales bounce (but we don’t need new ones right now)
4) Germany consumer confidence at best since Oct ’07
Negatives
2) Durable goods orders below expectations (but Nov revised up and core cap ex good)
3) Inflation expectations in Univ of Michigan hit highest since Oct ’08
4) Case Shiller home price index falls to 8 month low
5) Japan debt downgraded by S&P as nation chokes on debt with no plan
6) UK consumer confidence near 2 yr low, Q4 GDP unexpectedly contracts
7) German import prices rise at fastest pace since ’81
8) Egypt erupts
The Markets This Week
As the Egyptian military confronted protesters in the streets of Cairo, investors had to confront volatility again. So much for recent assumptions that investors had been inoculated against risk. The Standard & Poor’s 500 was on the brink of reclaiming 1300 for the first time since September 2008—until the Mideast turmoil sparked a 1.8% drop Friday, pushing the index down to 1276, the second down week in a row. The Dow, meanwhile, kept flirting with the 12,000 mark, only to drop 1.4% Friday, closing at 11,823 and notching its first weekly loss after eight weeks of gains. The industrial average hasn’t closed north of 13,000 since June 2008. Securities linked to the Middle East violence shuddered even more violently. The cost of insuring Egyptian government debt rose 25% last week. The Market Vectors Egypt Index, which trades in the U.S., tumbled 3.5% Friday. In the flight to safety, Treasuries and the dollar both rallied—although news that U.S. gross domestic product had risen an annualized 3.2% in fourth-quarter 2010 drove the yield on the 30-year bond to a nine-month high. Meanwhile, gold prices jumped nearly 2% Friday, their biggest one-day rise in three months. “Markets have come a long way in a short period of time,” Dan Veru, chief investment officer at Palisade Capital Management. “But the geopolitical risks are a caveat, and could change the view.” Indeed, Friday’s shudder dashed many investors’ hopes of revisiting previous milestones. “Investors are hungry for success with their portfolios, and want to at least get back to the levels of 2008,” says Kimberly Foss, president of Empyrion Wealth Management in Roseville, Calif. “I think there’s still a lot of cash building on the sidelines.” In fact, while some of that money has begun to slowly trickle into the market, fund flows into equities have only recently turned positive. This despite generally constructive quarterly corporate-profit statements. According to Bespoke Investment Group, 70% of companies that have reported fourth-quarter results have beaten their revenue estimates, a remarkably high number. Even financials, which haven’t fared as well as other sectors in the big rally off the March 2009 lows, are beating revenue estimates by that same 70%. “We’ve managed to proceed without the biggest participant in the S&P 500 not doing much,” says Palisade’s Veru. ”It’s amazing we’ve gotten the kind of gains that we have.” (Source: Barrons Online)
The Numbers
During last week, Foreign Stocks and Bonds advanced and U.S. Stocks declined. Bonds were unchanged. During the last 12 months, U.S. STOCKS outperformed BONDS.
|
Returns through 1-28-2011 |
1-week |
Y-T-D |
1-Year |
3-Years |
5-Years |
10-Years |
|
Bonds- BarCap Aggregate Index |
.4 |
0.1 |
5.3 |
5.5 |
5.8 |
5.7 |
|
US Stocks-Standard & Poor’s 500 |
-.5 |
1.6 |
20.1 |
.3 |
2.0 |
1.3 |
|
Foreign Stocks- MS EAFE Developed Countries |
.4 |
2.2 |
11.7 |
– 5.6 |
– .9 |
1.4 |
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized. Assumes dividends are not reinvested.
Abbreviated Version This Week
(Photo of Jets truck on the PA Turnpike enroute to Pittsburgh – courtesy of Erika Petrozelli)
I succumbed to the temptation of attending the Steelers-Jets game in Pittsburgh. On Saturday morning, I will be departing from my warm nest in Bethlehem to trek over the river and through the woods to the more frigid side of the state, intending to stay overnight at my brother’s house outside of Indiana (Pa). On Sunday, my wife Jo Anne, my daughter Erika and her husband Matt Petrozelli, and his father and mother will descend upon the three rivers to watch one of the coldest games in NFL history. There are 2 Steelers fans and 4 Jets fans in our mini-group so there will be some happier than others by the time you read this on Monday.
UPDATE: Steelers fans left happier than Jets fans…
Motivational Quote of the Week
“How people treat you is their karma; how you react is yours.”
-Wayne Dyer