IN VERY TYPICAL END OF MONTH fashion, the major equity indices were up last week. By the numbers, for the two weeks ended Friday, October 2, 2011, the Dow Jones Industrial Average closed at 11,240, up 423 points, or 3.9%. The Standard & Poor’s 500 closed at 1173, up 50 points, or 4.5%, and the NASDAQ Composite closed at 2480, up 139 points, or 5.9%.
Uncertainty, and to some degree fear, seems to be dominating conversations regarding the economy and the markets. The price of gold is a good way to measure this concern in dollar terms. While it’s difficult to do anything practical with a one ounce gold coin, gold has been seen as a safe haven in the face of fiat currencies, such as those that dominate our globe.
What’s interesting is that the major equity indices have followed a very traditional pattern this year. During most years, the stock market advances from January through spring, meaning April or early May. During early summer, the major indices are down, and during late summer, the indices are down even more. September has historically been an off month. Finally, within a month, the last few days of each month tend to be good days in the public markets. A study of 2011 to date indicates that it is following a very traditional pattern. If this pattern holds, September will be off, and the fourth quarter will be one of the best fourth quarters we have had in several years.
The Federal Housing Finance Agency plans to sue more than a dozen large banks, claiming they misled Fannie and Freddie regarding mortgages. The Jackson Hole Federal Reserve meeting has concluded, with little to show for the taxpayer dollars spent.
Warren Buffet just gave Bank of America $5 billion. In return, Buffet’s Berkshire gets 50,000 shares of cumulative preferred stock with a 6% coupon, all of which can be redeemed at a 5% premium. In addition, Berkshire gets warrants to purchase another 700 million shares of BAC common at $7.14. This means that Warren and company get $75 million in quarterly cash flow, and a built in gain of at least $250 million. At the moment, the warrants are underwater, but I suspect it will all work out for Berkshire.
According to RealtyTrac, 31% of home sales during the second quarter were on properties in some stage of foreclosure. This is up from 24% for the same period last year. Homes in foreclosure or bank owned had an average sales price that was 32% less than those properties not in distress.
Over the last few weeks, I’ve seen several emails that attempt to communicate our country’s financial situation in easy to understand terms. Here’s one. If the U.S. were the Jones family, the Jones’ would have an annual income of $21,700 and annual spending of $38,200. This year, the Jones’ have added $16,500 to their credit card balances, bringing these balances to $142,700. Realizing they were in a crisis, the Jones’ had a family meeting, and decided to reduce spending by $385 a year.
On the economic front, there was no net new hiring in August, with the 17,000 private sector jobs being offset by 17,000 layoffs in the government sector. We applaud the decision of state and local governments to get their fiscal houses in order, and would suggest that the federales take lessons from these folks. The official unemployment rate continued at 9.1%.
The revised GDP report for Q2 2011 showed annual economic growth of 1%, substantially less than the 3.5% needed for robust economic health. Corporate profits rose 3% during the second quarter, up from a rate of 1% in each of the two previous quarters. Over the last year, corporate profits are up about 8%.
Auto sales are showing strength, as consumers appear to be choosing cars over homes. At the close of the market on Friday, August 26, the yield on the 90 day T Bill was showing as -0.01%. Reflecting a negative interest rate is an interesting statistical anomaly that may mean little in reality, but speaks volumes about where we are as a country.
A recent national survey of persons earning six figure incomes showed that 14% were living paycheck to paycheck, 6% said they weren’t making ends meet, 24% had missed a bill payment in the last 12 months, and 55% had either reduced retirement plan contributions, or were making none.
What’s fascinating in all this is that one third of the homes being purchased are being paid for in cash. The take away? The macro economic environment and our personal economic environment may have little correlation to each other. The key to long term financial health is a consistent discipline of no debt, consistent savings and giving, and spending less than we make. Not rocket science, but not practiced by many on a consistent basis.
Quote of the week:
“The income tax has made liars out of more Americans than golf.”
Will Rogers
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