It was another positive week for the markets through the close on Thursday, February 17, 2011, with the Standard & Poor’s up 0.85%; the Dow Jones Industrial Average up 0.37%, and the NASDAQ up 0.79%.
On Monday, the White House released their proposed fiscal 2012 budget. To put it kindly, the $3.73 trillion budget is light on near-term deficit reduction and heavy on “kicking the can down the road.” The goal discussed is about reducing the deficit by $2.18 trillion throughout the next decade. Unfortunately, most of the savings are in the “out years,” meaning more than 95% of savings will occur after President Obama’s first term in office is over. Additionally, nearly two-thirds of the expected deficit reduction should arrive after 2016, well after Obama’s second term in office were he to be re-elected. Spending cuts in the budget add up to a mere $20 billion net reduction in the next three years—hardly a dent in the estimated $3.5 trillion deficit.
Locally, Georgia is set to receive from the federal government a small portion of the money to expand the Port of Savannah in order to in attract the larger ships that will pass through the Panama Canal in 2015. The total cost of project is estimated to be more than $550 million, and is largely regarded as the state’s most important economic development project. State leaders requested $105 million in federal assistance; however, the budget proposal includes just $600,000 in “pre-construction” money. Governor Deal and our Senators Isakson and Chambliss have promised to continue seeking federal funding. Nearly 50% of traffic to and from Savannah travels through the Panama Canal. The Port of Savannah is the second busiest Atlantic port, only behind the Port of New York/New Jersey.
We also noticed that entitlement reform was completely left off the White House’s proposal. We see both Democrats and Republicans reluctant to address the need to raise the retirement age. We believe the money the 30- to 40-year-old demographic is paying into Social Security now is there to benefit those currently in their 70s. However, we also believe we need to raise the minimum age to receive Social Security and Medicare benefits to 70 for those currently in their 30s and 40s. Many investors in this age bracket are not including future Social Security benefits in their financial plans, because there is concern that the system is broken.
We received a clearer picture of inflation this week with the Producer Price Index on Wednesday. Prices for finished goods rose 0.8% in January with core prices, excluding food and energy, rising 0.5%. Prices are increasing at all stages of production; however, we are not seeing a full pass-through to the consumer because of high unemployment and excess capacity in the economy.
Additionally, in Thursday’s Consumer Price Index release, we learned that food and energy prices, again, contributed to the upside, but core CPI increased a healthy 0.2% in January, which was higher than the expected 0.1% increase. Still, year-over-year core inflation is only 1%, which is half of the Federal Reserve’s target rate.
Housing starts surged in January with a 14.6% gain, largely driven by the multifamily sector. Retail sales also increased 0.3% in January. Industrial production saw an unexpected decline of 0.1% because of weakness in utility and mining output and slower growth in manufacturing.
We believe we could see unemployment drop below 9% this year—not as a result of those dropping out of the workforce, but because we expect to see retail hiring. Home Depot (NYSE: HD) announced they would be adding 60,000 jobs for their busy season in spring. We also believe there will be growth in health care and that manufacturing could stage a comeback. We feel that the spring season will also bring a surprise in housing numbers.
Disclosures
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