The above chart from www.shadowstats.com illustrates the need for jobs with the broadest unemployment rate (U6) at over 16%.  Today’s employment numbers for May were a disappointment.

We are all disappointed with the BP oil spill in the Gulf and clearly more precautions should have been taken.  The resulting oil spill has been heartbreaking to watch.  That being said, we believe the media has blown the damage to the Gulf Coast out of proportion and has managed to frighten people.  The well should be and will be shut down and any damage cleaned up by BP.  We must keep in mind that over 900 wells in Kuwait were set on fire by Saddam after his 1990 invasion.  Led by many American companies, we were able to put out the fires and cap every one of them.

Deep Water Drilling Ban
Last Friday the Obama administration announced a halt of “deep water” drilling in the Gulf of Mexico. The drilling moratorium will have lasting consequences for Texas and the Gulf coast in the form of lost production, job losses and lower tax revenue.   According to a Morgan Stanley report dated May 28, 2010, it will result in the shutdown of 34 deep water drilling rigs, which comprises 23% of the global active fleet of 139 rigs.  In addition, 74 new deep water rigs are under construction.  Deep water drilling has been done all over the world.  The United States just lent Petrobras $2 billion to expand deep water oil drilling in Brazil.  Deep water drilling is going on in Africa, South America, Australia, Asia and Europe.  Everywhere except the United States!

The first “offshore” well was drilled off a pier in Summerfield, California in 1987 by HL Williams.  In 1947, Kerr McGee drilled the first oil well out of land view off the shore of Louisiana.  Shell Oil drilled the Cognac well in the Gulf in 1025 feet of water in 1977; we were drilling in one thousand feet of water thirty three years ago!   We have been drilling in the Gulf of Mexico for over sixty years with very few problems.

After over sixty years of offshore drilling, Houston is the deep water drilling capital of the world.  We supply the personnel, technology and equipment to drill worldwide.  We are the global drilling and production leaders for deep water drilling.  Now that strategic national leadership is in danger with the deep water drilling shutdowns.  Thousands of jobs are at risk!

37,400 Jobs at Risk!
So far 34 deep water rigs are in the process of being shut down in the Gulf of Mexico by the Obama Administration.  According to a story in the Houston Chronicle “each drilling rig supports 800 to 1400 jobs including rig crews and other secondary personnel”.  If we figure they support an average of 1100 employees per rig, then 37,400 jobs could potentially be in danger by the drilling ban put in place by the Obama Administration.  According to the same story by the Louisiana Mid-Continent Gas Association, up to $330 million in monthly wages could be lost.  The whole Gulf Coast region could slow down as the deep water drilling ban is instituted; we could see oil and gas production down 11% next year in the Gulf.  To make matters worse, it could endanger Houston’s position as the energy capital of the world as cutting edge inventions and technologies move overseas.  The deep water drilling ban is a poorly thought out panic-induced decision by the Obama Administration that will result in lost jobs and strategic industry for the American people.  It will further slowdown the economic recovery and result in layoffs.

We are now seeing the results of the Obama Ban; Anadarko Petroleum said it may “shift capital spending on capital projects to other regions”.  Halliburton and Baker Hughes are looking at relocating people and equipment out of the Gulf.   The drilling companies will all be looking to move their deepwater rigs to other countries.  Every major oil company is now redeploying capital out of the Gulf and in many cases out of the United States.

The losses from the deepwater drilling ban will not just be confined to the loss of thousands of jobs and an economic slowdown in the Gulf Coast.  Oil and gas production will begin to drop in the Gulf of Mexico, requiring more imports from the Arab countries.  This will result in higher trade deficits in the Untied States and money moving overseas.  The lost oil and gas royalties will result in lower energy royalties for the federal and state governments at a time when we are running massive budget deficits that have gotten out of control.  Federal governments will also see a drop in income taxes from personal and corporate taxes as business slows down and people are laid off from their jobs.  Gulf Coast states are poised to lose state sales taxes as corporate and personal spending begins to slow down.  We do not believe that this had to happen; as we pointed out, we have an over forty-year safe deepwater offshore drilling record in the Gulf of Mexico.  We believe a thirty day “safety slowdown” of deepwater drilling to reassess safety procedures for deepwater drilling would have been sufficient.  The deepwater drilling ban is nothing more than a poorly though out job killer for the United States.

Europe
The stock market is in the midst of a correction that has taken us to the February lows.  The market has been under pressure from three main concerns: Greece contagion, China slowdown, and a double dip in the United States.  The thing to watch for in Europe is whether or not the contagion from Greece will spread to Spain or to the European banks.  We are now seeing most European countries starting to cut spending and reduce budget deficits.  We are seeing large budget cuts in Spain, Italy, Greece and other countries.  We view this as a major positive as the Europeans begin to get their social programs under control.  One of the things to keep an eye on is the Libor, or the inter-bank lending rates, that banks lend to each other.  So far that rate has nearly doubled from .25% to just under.5%, but we must remember that in 2008 it rose to over 4.4%.  We believe we will continue to see problems with European banks, the question is how much.

The Euro will head lower, but will be held together by the Germans that are very tough on inflation because of the damage inflation caused in the 1920s-30s in Germany.  The hyperinflation in Germany led to World War II and the destruction and bifurcation of Germany.  The European Central Bank could be pushed into quantitative easing soon that should be bullish for gold.  Today we are hearing Hungary could be having financial problems. We must now watch and see how far this Euro contagion spreads.  We believe this crisis over time will present an opportunity for very good values in European stocks.

China Slowdown?
China, at the present time, is in the midst of a property bubble in the commercial and housing markets, a topic we have written about over the last year.  By some estimates, 60% of the Chinese economy is generated by construction.  China has now raised lending requirements to purchase real estate, put limits on the number of houses that can be purchased, increased real estate taxes and cut back real estate lending to halt the real estate bubble.  We believe that the real estate bubble is close to busting and, when it does, the Chinese economy will slow down.  The Shanghai stock market is now hitting one year lows as can be seen from the chart below.  This appears to be signaling a slowdown in the Chinese economy.

Copper
China has been the driver for commodity prices from copper to oil to grains.  If China has an economic slowdown, commodity prices could fall, which is what we are now seeing with copper.  Pay close attention to copper prices, which have fallen recently as they are signaling an economic slowdown as well.  As the price of copper goes, the S&P 500 tends to follow closely.

The United States economy has been picking up strength for over six months.  We believe the closer we get to the fourth quarter, the more likely the US economy will start to slow down.  Much of the stimulus program has been designed to boost the economy before the mid-term elections in November.  In addition, we believe that the Obama healthcare plan has muddied the waters sufficiently that companies will refrain from hiring at the worst possible time, just as the economy is starting to recover.  Now with the drilling shutdown in the Gulf, this just means more cutbacks at the worse possible time.   The drilling ban and Obama healthcare plan have increased the odds for a double dip in the economy.

Investment Outlook
For the above reasons, we would continue to be very cautious investing in the equity markets.  We continue to favor high quality multinational companies that pay good dividends.  These companies that sell products worldwide have the balance sheets to expand in tough times.  With the higher dividends, you also get paid while you wait for an economic turnaround that should take a number of years to work through.  We continue to favor large cap mutual funds over small and mid cap.  Regarding the energy sector, we would avoid a large personal overweight in the sector given the apparent animosity that the Obama Administration appears to hold toward the oil and gas industry.  That said, at MaxOut Savings Advisors we continue to invest in the sector for our clients and believe in its long term future.  The Obama Administration is appearing to be increasingly anti-business and jobs; this will have a negative effect on the stock market.  Now is the time to be managing risk in your retirement plan.  We would maintain higher than normal levels of cash or money market funds until we get through these very turbulent times or when stock market values become very compelling.

Remembering the motto of the MaxOut Savings Show to Save Aggressively and Invest Conservatively, now is not the time to cut back on your savings for retirement.  A mistake many people make is to cut back on savings in a market correction.  This could set your retirement plan back years.  If you are worried about the investment markets, invest more conservatively and keep on saving aggressively for retirement!

529 College Plans; Are You Saving for College?
After just paying expenses for my son at Texas A&M, I can assure you college expenses have gone up.   It is important to save ahead of time for college.   An ideal way to save is with a 529 College Savings plan that is offered by most states.  The 529 plan allows you to save for your children’s or grand-children’s college expenses tax free.  The 529 plan distributions will pay for most college expenses including tuition, books, room and board.  Most states have a sponsored 529 plan and you need not use your state’s plan.  A good place to compare 529 plans is the website savingsforcollege.com.

Depending on the plan you choose, 529 plans can be opened at a bank, brokerage firm or mutual fund company.   Most 529 plans invest in mutual funds, so look to ensure your plan has a large choice of funds to invest in.  We like the Pimco-Allianz College Access 529 Plan sponsored by the state of South Dakota.  Investors from all 50 states can invest in the program.   If you are more comfortable with one fund group over another, most fund families manage or participate in 529 plans in one way or another. As college approaches, the asset mix should become more conservative remembering that the plan is often drawn down over a 4-5 year period.  Try to keep the upcoming years expenses in a short term bond fund or money fund.  A bear market can wreck a college fund if it happens during the college years due to the short draw down period, so plan accordingly.   Typically, only cash can be contributed to start the plan. There is no maximum contribution with the exception of a plan max, in most cases in excess of $200,000.  College costs have risen dramatically in the last decade.  It is important to save the money ahead of time.

Paying for College
Do not be put off by the need to save over $100,000 for your child’s college.  The key is to save enough that, combined with student aide, grants, loans, and working, you can get them through school. That becomes very difficult if no money has been saved for college ahead of time.  If you have a child that will be heading off to college this fall, now is the time to determine where the money will come from to pay for it.  Most people do not have enough saved up in their children’s college fund to pay for all the costs.  First, figure how much you have saved for schooling, then divide that number by four.  This number is how much you have per year available from savings.  This is our base funds available.  From there, we begin to look at all other sources of funds to pay for the higher education. Take a look to see what is available in the form of scholarships and grants.  Some good places to start is the school they will be attending.  Also check with your employer and church; they often have scholarships available.  Often times grandparents are willing to contribute to help with their grandchild’s education.  Then take a look at how much you can afford per month out of your income.  Finally, working some during college is a great source of funds as long as it is not too disruptive to studies.  A good friend of mine once remarked that of the people at his Fraternity at the University of Texas, the ones that worked during school went on to be the most successful of the group.  The people that worked during college went on to be presidents of some of Texas’s largest companies! When all these sources of funds are added together, it makes paying for college for your children much more attainable.

Ed Slott’s Elite IRA Advisor Group
As a member of Ed Slott’s Elite IRA Advisor Group we can help you should you have a question about your IRA or IRA rollover.  We undertake hours and hours of training with the best IRA experts in the country to keep up with the IRA and IRA rollover rules.  If you need help or have a question, give us a call.

Do you have an account at Fidelity?
Do you already have an account at Fidelity Investments?  The MaxOut Savings Advisors Team can actively manage the assets for you at Fidelity.  We will make the investment decisions for you and you can monitor your account from Fidelity’s website.  We use the same value based investment strategies we talk about on the MaxOut Savings Show every weekend.  In most cases, you can sign a simple form to add us as the advisor to your account and we can use your same Fidelity account number.

Considering an IRA Rollover?
If you are retiring soon or considering an IRA rollover, let the MaxOut Savings Advisors Team handle your IRA rollover.  We can help you take advantage of the NUA tax break if you have low cost basis company stock in your plan.  We will sit down with you and go over your financial situation and needs and come up with a plan.  We will show you how we actively manage accounts using our value analysis strategy to grow your investments and reduce risk.

MaxOut Savings Advisors: Actively Managing Risk
In these volatile times, investing your retirement funds can be difficult and time consuming.  Is your advisor looking at risk and actively managing your retirement account?  Hiring the MaxOut Savings Advisors Team to manage your money or IRA rollover is a great first step toward a successful retirement.  MaxOut Savings Advisors, LLC is an SEC registered, fee-only investment advisor based in Houston, Texas.  Ted Geoca has over twenty year’s of investment experience managing clients’ retirement assets.  We invest in stocks, bonds and mutual funds for our clients using a value analysis strategy that we have developed over the last twenty years.  We look at risk as well as return to actively manage your investments through today’s changing markets.  We use Fidelity Investments as the custodian for our clients’ assets.  If you would like MaxOut Savings Advisors, LLC to manage your retirement investments using our value methodology, I would be happy to meet with you.  To schedule an appointment please give us a call at (713) 627-0400 or email me at ted@maxoutsavings.com.

Remember Save Aggressively and Invest Conservatively!