As seen above, the sharp increase in savings was the result of people cutting back spending across the board.  The drop in spending is the result of two major trends: first, frightened consumers who are cutting back because they are worried about their job and the economy and, just as importantly, a large cutback in credit provided to the consumer through credit cards in the form of lower credit limits and tighter mortgage lending standards.  The negative of this increase in personal savings is that the consumer has recently accounted for 72% of the US economy, which is about the highest ratio of consumer spending in the world.  When the consumer slows down spending to save more, the economy slows down as well.  We believe that consumer savings rates will remain at a higher plateau permanently.  Therefore, consumer spending will remain at a slower pace and the economy will remain sluggish.

The positive of this increase in personal savings is that the US consumer is now saving more for retirement.  This will result in the American consumer building more wealth over time.  As this wealth is built up, they will be able to help fund our budget deficits and government borrowing.  Over time, this will lead to a much stronger country economically.  In addition, as consumers cut back their spending to save more, our current account (trade) deficit will decline.  At MaxOut Savings Advisors, we are thrilled to see people saving more money!

Stock Buybacks
According to a study by Standard and Poor’s, stock buybacks have fallen 73% in the first quarter of 2009.  For the first quarter, just $30.8 billion of stock was bought back by companies compared to $113.9 billion in the first quarter of 2008.  On an interesting note, Exxon accounted for over one quarter of all stock bought back in the first quarter of 2009.  The main reason for the sizable drop in stock purchase programs is that many companies found themselves with a poor quality balance sheet going into the financial crisis of 2008 and needed to increase their cash reserves.

Gold and Silver ETFs
On the MaxOut Savings Show, we often get questions about investing in gold and silver.  ETFs are one of the best ways to own gold or silver.  This is especially true in IRA and qualified plans where there are restrictions on holding physical gold—with the exceptions of the US Gold & Silver Eagles.  We first wrote about gold in the MaxOut Savings Report back in December of 2001 where we predicted “gold was about to start off a major bull market that would last over a decade.”  At the time, gold was priced at under $280.  It is now over $900 and we believe gold will go higher as the US Dollar decline resumes.  If you want to own physical gold it can be purchased in two forms: bullion and coins or ETFs (exchange traded funds).

There are 3 Gold ETFs on the stock exchanges: streetTracks Gold Trust (GLD), iShares Comex Gold Trust (IAU) and PowerShares DB Gold (DGL).  The streetTracks (GLD) and the iShares (IAU) are gold trusts that own the physical gold in vaults.  The PowerShares (DGL) owns no physical gold, but creates exposure through the commodity futures market by owning futures contracts and has excess funds in the Treasury Bills.  This method could reduce expenses as the T-Bills pay some interest and you receive a dividend.  We prefer the gold trusts (GLD and IAU) because they own the physical gold and are not subject to the uncertainties of the futures markets.

The silver market offers the same opportunity to invest in silver on the stock exchanges through ETFs.  There are two ETFs for silver: iShares Silver Trust (SLV) and PowerShares Silver Fund (DBS).  The iShares (SLV) are a silver trust and own the physical silver in vaults.  The PowerShares (DBS) use the futures market to “hold” the silver.  The PowerShares (DBS) can pay some dividend due to the T-Bills.  Again we prefer the iShares (SLV) because it is a silver trust and owns the metal.

Starting in early 2008 we warned investors of the dangers of British debt because of the high levels of financial debt of the countries banks relative to the size of the GDP.   A recent chart in the London Financial Times reminds us that the dangers still exist.  The chart shows that banking assets as a group account for over 400% of GDP.  This compares with less than 100% bank assets to GDP in the US.  Switzerland had the highest with 900% bank assets to GDP.  Other countries with large bank assets to GDP are Ireland, France & Germany all with ratios over 300%.   The countries with the high ratios could have real trouble if more banks fail because their economies are not large enough relative to the size of their banks to support a further bailout.  This also gives us another clue that Europe still has big financial problems to deal with.

State & Local Government Problems
Starting July 1^st, California has threatened to start paying its bills with IOUs as they will be running out of money.  Moody’s bond rating service is threatening to downgrade California unless they can reduce their $24 billion deficit.  State and local municipalities budget problems are only now starting to come out.  As the year progresses, we expect to see many local and state governments in trouble.  Most municipalities get a good portion of their taxes from sales and real estate taxes.  We are expecting to see a sizable drop in tax revenue from both of these sources in 2009 and 2010.  This problem has been exacerbated by spending that has gotten out of control in many state and local governments.  We have not heard about much lately about municipal employee benefit plans have become more generous than many corporations give to their employees.  Some of these programs have depended on ever rising financial markets to pay for the benefits.  With the decline in investment prices worldwide, many government benefit programs are now underfunded by billions of dollars.  All these problems will lead to tax increases and, in some cases, bankruptcies in 2009 and 2010 as state and local governments struggle to balance their budgets.  State and local governments will be the big stories for the next 18 months.   The positive is that state and local governments have an excellent track record and low default rate overall.  Therefore, with some research, municipal tax-free bonds remain a great investment.  They look especially good given you can find quite a few paying over the treasury rate even though they are tax-free.  We would avoid revenue bonds and concentrate on “GO” or general obligation bonds.  The GO bonds have a call on the taxing authority of the state or city. This gives you a much higher quality bond that has better protection in the event of financial problems.  We believe that later this year and in 2010 we will see some great municipal bond opportunities.  So far the municipal problems have been flying under the radar, which will soon change.

Outlook
The world’s economy has had a very large overall decline in spending and credit contraction.  This will all take years to come back to get to the economic level we were at in 2007.  We are still very cautious on the stock market outlook.  Over the next several years, income will play a major role in overall investment returns.  Therefore, we continue to look for dividends and interest to boost our returns.  We continue to maintain higher than normal amounts of cash and would use pullbacks as buying opportunities with the exception of stocks that are trading close to their lows.  These pullbacks and mini-crisis are where we will find outstanding opportunities. To get the opportunities you will need to have the cash available. The odds are very high that we will see continued weakness in the economy and a pullback in the stock market some time in the next nine months. The wildcard in here is how do the massive changes the Obama Administration has in store for the economy affect asset valuations.  We suspect that if the changes are pushed through and the government takes a much greater role in allocating economic assets, it will lead to a negative revaluation of US assets.  There has never been anything like the free enterprise system to grow an economy.  To quote Alan Greenspan this week in an OpEd in the Financial Times, “The alternative of political allocation of resources has been tried; and it failed”.

The Education of an American Dreamer
Last week on the MaxOut Savings Show we interviewed Pete Peterson the former Secretary of the Commerce, cofounder of Blackstone Group, chairman emeritus of the Council on Foreign Relations and retired Chairman of the New York Federal Reserve.  It was a great interview and by popular demand we will rerun the interview this weekend.  Mr. Peterson is very concerned about our economy and the structural problems we face. To that end he endowed the Peter G Peterson Foundation with almost $1 billion of his own money to educate the American people to the huge problems we face.  You can find the Peterson Foundation at pgpf.org.  We will be hearing a lot from them in the future as they begin the new education campaign about social security, medical cost and our deficits here in the United States.  His new book “The Education of an American Dreamer” How a son of Greek Immigrants learned his way from a Nebraska Diner to Washington, Wall Street and beyond was a great read.

Need Help?
Do you already have an account at Fidelity Investments?  Why not let the MaxOut Savings Advisors Team manage the assets for you at Fidelity?  In most cases you can sign a simple form and we can use your same Fidelity account to get you started.

Considering an IRA Rollover?
If you are retiring or considering an IRA rollover let the MaxOut Savings Advisors Team handle your IRA rollover.  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 manage accounts using our value analysis strategy to grow your investments and reduce risk.

Who is MaxOut Savings Advisors LLC?
In these volatile times, investing your retirement funds can be difficult and time consuming.  Hiring the MaxOut Savings Advisors team to manage your money or IRA rollover is a great first step.  MaxOut Savings Advisors is an SEC registered, fee-only investment advisor based in Houston, Texas.  Ted Geoca has over twenty year’s 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 use Fidelity Investments as the custodian for our clients’ assets. If you would like MaxOut Savings Advisors 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!