Texas Job Growth #1
Fed Bond Buying
Food, Energy and the Poor
Housing Prices
Solving the Municipal Budget Crisis
Market Outlook
Risk Off!
Texas Job Growth #1!
In a recent speech, Dallas Federal Reserve Governor Richard Fisher pointed out
that the best job growth in the United States has been in the Dallas District that includes all of Texas! He pointed out that the reason, in his opinion, had nothing to do with monetary policy
or the cost of capital because they are the same throughout the United States. The
reason for the differences in job growth from state to state had everything to do with taxation, fiscal and regulatory polices.
Federal Reserve Governor Fisher has been a hawk on the Fed and not a supporter of QE2. The Chart
below from the Dallas Fed shows job growth over twenty years across the United States by Federal Reserve
District. We can see the South and Midwest has done the best, areas with low
taxes and less regulation. The Dallas district came in at 150 on the index, New York and Boston districts were 100-105 with little job growth over twenty years. In
the chart below, we can see how a low tax, business friendly environment produces job growth over the long term!
Fed
Bond Buying
We often hear the refrain if we upset China they
will stop funding our deficits and interest rates will rise. The truth is that China has already cut back
on funding our deficits, something we have written about in our Reports last year. Recently it was reported
that the Federal Reserve has surpassed China as the biggest holder of US Treasury securities. Federal Reserve
holdings of Treasuries now amount to $1,108 billion ($1.108 trillion). This compares to China, which holds
$896 billion in Treasuries, and Japan, with holdings of $877 billion. With the QE2 (quantitative easing)
program now in place, the Federal Reserve is expected to have accumulated over $1,600 billion of Treasury securities by June.
The $600 billion QE2 program started in November of last year and is scheduled to be completed by June of this year.
This is in addition to an estimated $30 billion per month reinvestment of current Federal Reserve debt holdings.
The Federal Reserve is now a bigger financier of US government deficits than China.
We are already seeing China and Japan pull back from financing our out of control budget deficits.
The Federal Reserve has moved into the breach to try to keep long term rates low, which could be an unspoken reason
for QE2. Of the QE2 buying, 67% has been devoted to the 4½- to 10-year Treasury securities in a
bid to keep longer term interest rates low. As we can see from the chart of the ten year interest rate,
the QE2 program is having trouble keeping rates down. We can see that the ten-year bond rate is actually
breaking out to the upside and rates are moving higher from the chart below of ten year US note yields.
|
| Lower lows in China stock market |
The drop in yields the last two days is the result of safe haven buying because
of the Libyan crisis.
Rising Food and Energy
One thing that QE2 has been very successful at
is raising commodity prices. Over the last seven months we have seen huge moves in commodity prices.
1. Corn up
100%
2. Wheat
up 85%
3. Soybeans up
47%
4. Cotton
up 150%
5. Sugar
up 95%
6. Oil
up 37%
Food, Energy and the Poor
Food and energy prices are often dismissed by some experts as being too “volatile” and misleading so
the Fed sees the core inflation rate, which excludes food and energy prices, as a more useful gauge. The
problem with that is two fold; first the core inflation number has been substantially changed and manipulated to minimize
inflation. It is harder to disguise food and energy inflation. The other problem with
ignoring food and energy inflation is that it disproportionately hits the poor. People earning under $30,000
a year tend to allocate over 23.5% of their spending on food and energy. This compares to 9.8% for income
groups earning $120k to $150k. This points out that the food and energy inflation that is often minimized
does huge damage to the lower income groups’ standard of living in the United States.
The problem is materially worse overseas.
In many countries, the poor make only a couple of dollars a day. In Egypt, poor is defined as making two dollars per day. A family earning
two dollars per day could easily be spending well over 50% of their income on food and energy. When you
get 20-100% moves up in food and energy prices, you get people rioting. This is one of the problems that
led to the revolutions in Egypt and Libya. We believe that skyrocketing food costs have been the catalyst
to the revolution sweeping the Arab world. Inflation and crop failure has been a catalyst for revolution
for centuries. Many developing countries around the world are now working to control food costs and improving their peoples’
standard of living after what happened in Egypt and Tunisia recently.
The push to prevent deflation with QE2 has resulted in higher commodity prices worldwide that is having unforeseen
consequences of destabilizing developing countries as the poor in those countries suffer disproportionately from food and
energy inflation.
Housing
Prices
In December, according
to the S&P/Case-Shiller home price index, housing prices in the twenty largest cities fell 1%. The
index had declined for five straight months. The only city where housing prices rose in December was Washington DC, which most people would not view as a positive!
As can be seen from the chart below home prices appear to be entering a new leg down. The higher
energy prices will have a negative effect on home prices and we expect home prices to continue to fall in the first and possibly
second quarters of 2011.
Solving
the Municipal Budget Crisis
The protests in Madison, Wisconsin
have brought to the forefront the difficulty of cutting state budget deficits. At the present time, 44
states are grappling with budget deficits. Most states are required, constitutionally to balance the budgets
but, unlike the Federal government, they cannot print money. The past couple of years they have gotten
by with emergency funds, accounting tricks, and billions of dollars of Federal help. That has come to an
end and they now must make the tough cuts or face bankruptcy. We expect the budget cutting and the protests
to spread across the country. Most major states including New Jersey, New York, Ohio, Illinois California
and Texas have to make big budget cuts or they will be in trouble. State and local government accounts
for 16% of GDP and we expect layoffs to spread across the country in 2011. This will be a drag on economic
growth.
The protests in Madison and across the country protesting
budget cuts are good news because it means we are making the tough choices to solve our economic problems! The
Republicans won in November and they are making the tough choices. The cuts are painful but necessary to
get municipal governments on sound footing. When you see the union protests, remember this means we are
making good progress toward solving the deficit problems in state governments!
Over the last five years we have written about the dangers of low savings and the debt bubble and runaway government
spending. We said it would result in an economic crisis and it did. We then said that
after the crisis the debt bubble would take years to fix. For the first time we are now seeing real progress
being made to fix our spending and debt problems. It all started with the Tea Party Republican wins in
November. Before that it was “kick the can down the road”. All across the country people are
rising up to fight government spending and make the tough cuts. We are now winning budget battles and making
progress toward winning the war on runaway government spending.
Market Outlook
The destabilization of the Middle East
and the fiscal battles in Washington and municipal governments has created a very uncertain investment environment.
The US stock market has moved slowly higher for almost six months and is overbought and overvalued. Over
the last six to eight months, we have seen substantial commodity inflation that is now starting to pressure profit margins.
We believe the stock markets are in the process of a substantial correction.
We continue to favor blue chip multinational companies with good dividends, stable demand, energy and short
term bonds. We would avoid emerging markets, small, mid cap stocks, tech and manufacturing as they have
become overvalued. The bull market in precious metals should continue, its case strengthened by the unrest
in the Middle East. Given the unrest in the Middle East and Republican budget cutting, the dollar should move higher in the
short term as it is viewed as a safe haven. This should also cap the rise in US bond yields over the near
term. As the year progresses, the municipal bond market will offer great value as the municipal deficit
crisis continues to unfold.
Energy stocks are poised to move higher
if the Middle East destabilizes further. The one drag on energy is natural gas priced under four dollars
in February. After a very cold winter, natural gas looks poised to move toward three dollars in the spring
and that could be a drag on energy company profits. Libya currently produces about 1.8 million barrels
of oil per day. At the present time about 55-60% of Libya’s production appears to has been shut in.
Over the weekend our work suggested Libyan problems could add $20 per barrel to the price of oil (WTI crude).
That could be somewhat conservative if much more production is shut in over time. If Libya destabilizes
further into civil war and if the problems spread to Algeria (2.1 million barrels per day) we could see oil prices move toward
$150. If oil moves much above $100 dollars it could cause a decline in the US economy and a decline in
company earnings.
Risk Off
Care should now be taken to closely monitor risk in your 401-k
plan or retirement account. This is also known as Risk-Off; take a look to see if you are over-invested
in the markets or in any one sector. If you are not comfortable with your risk levels, reduce the risk. This
can be done in several ways; you could raise cash or sell stock and increase bond holdings. By increasing
cash positions you can lock in a profit and afford to wait for a better buying opportunity, while at the same time avoiding
a stock market selloff. Another method is to sell the more volatile sectors such as small cap, high yield,
tech, emerging or developing markets. If you still want market exposure look at large cap stocks, stable
demand and shorter term bonds. Now is the time to be cautious with your retirement savings plan and mange
risk. As Will Rogers once said: “It is not the return on my money I am interested in, it is the return
of my money!”
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. In most cases, you can sign a simple form to add us as the advisor on your
account and we can use your existing 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 stock in your company plan. We
will sit down with you, discuss your financial situation and needs, and develop a plan tailored specifically for you.
We will show you how we manage our accounts using our value analysis strategy to grow the 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?
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 is an SEC registered, fee-only investment advisor based in Houston, Texas. Ted
Geoca has over twenty years 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 couple
decades. We look at risk as well as return to actively manage your investments and maximize your
returns through today’s changing markets. 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!Ted K Geoca
Kellan Caldwell Doug Saam
President
MaxOut Savings Advisors,
LLC
Houston, Texas
ted@maxoutsavings.com
713-627-0400
www.maxoutsavings.com
Remember to catch:
The MaxOut Savings Show with Ted Geoca on Saturday at 11:00am on KNTH 1070AM!
The MaxOut Savings Show and Report does not give out financial advice.
Any recommendation may not be suitable
for all investors. Moreover, although information contained herein is believed to be reliable, its accuracy
cannot be guaranteed. MaxOut Savings Advisors, LLC may or may not have positions mentioned herein. MaxOut
Savings is a Registered Investment Advisor registered with the SEC. You should always make investment decisions based on your
own financial situation. |
