The new month began as a fierce rally with all major U.S. indices soaring more than 2% on Wednesday, Dec. 1, 2010, effectively wiping out the 1% loss of November. Through the end of Thursday, December 2nd, The Standard & Poor’s 500 Index was up 2.70%; the Dow Jones Industrial Average was up 2.44%; the NASDAQ climbed 1.77%, and the Russell 2000 was up 2.52%. However, the week beginning with fears about potential government defaults in Europe. The euro currency and European stock markets fell on the news that Ireland was bailed out on Sunday and borrowing costs for Portugal, Italy, Spain and Belgium jumped. By Tuesday, the costs of insuring government bonds from Portugal, Belgium, France, Spain and Italy hit record highs.
Stateside, President Obama proposed a two-year salary freeze on all federal civilian employees, as a way to rein in the U.S. budget deficit. We feel many federal employees are overpaid as salaries are 30% to 40% higher in the federal government than in the private sector.
Also this week, the Federal Reserve released details on $3.3 trillion in emergency loans made during the 2007-2009 financial meltdown. The United States essentially bailed out the world. The Fed has received a lot of flack, because it appears they tried to hide this. To us, it reiterates the strength in our economy.
In our opinion, most U.S. consumers did not realize how bad the recession really was, what was actually going on and how it affected their ability to purchase everyday items. Banks were not lending to other banks. Short-term money was essentially frozen. These details from the Fed are a reminder of how crippled the financial system had become during the crisis and how much it’s recovered since.
For example, consider Black Friday: Stores generally borrow money in September or October to stock inventory for the holiday shopping season after Thanksgiving. They finance their inventory with 90-day money. As the shopping season depletes the inventory, stores pay off their loans. Without this short-term money available, stores are unable to stock inventory, they cannot hire employees to sell merchandise that they do not have, and manufacturers begin making less merchandise, because retailers are not buying it, which leads manufacturers to lay off workers.
At the height of the crisis in the fall of 2008, credit had virtually dried up. The Fed’s programs were credited with helping restore the health of individual banks and stabilize the financial system. One of the programs the Fed created provided low-cost, short-term loans to banks. Another sought to ease credit problems in the commercial paper market, which many U.S. companies use to finance everything from salaries to supplies.
Federal Reserve Chairman Ben Bernanke is the leading expert on the Depression. We feel we are in good hands with him. The fourth quarter 2010 has shown the highest earnings ever in total dollars for S&P 500 companies. Manufacturing is still at 56.6, which is still in expansionary territory. ADP reported that private-sector jobs rose by 93,000 in November, beating economists’ expectations. The bad news was that new claims for unemployment benefits rose more than expected to 436,000.
The Employment Situation report on Friday showed job growth was much weaker than expected in November. Wall Street expected an addition of 160,000 jobs, but the official report showed a gain of a mere 39,000 jobs. Unemployment also unexpectedly rose to 9.8%.
Interest rates continued their upward trend last week. The two-year Treasury rose to 0.53%, the five-year Treasury jumped to 1.65%, and the 10-year Treasury also rose to 2.99%, which is nearly 0.60% higher than we’ve seen in recent months. The 30-year Treasury also rose to 4.25%, which is 1.75% higher than the all-time low set two years ago in December 2008. We think we will see interest rate increases continue through the new year.
In company news, American International Group, Inc. (NYSE: AIG) returned to the bond market for the first time since its September 2008 bailout. AIG issued nearly $2 billion in new debt. This begs the question, “Who in their right mind would buy AIG bonds?” Our feelings are that AIG would not have brought the bonds to the marketplace if there were not a buyer. AIG’s 10-year bonds are yielding 6.4%. We still feel investors would be better off with dividend paying stocks like Verizon Communications Inc. (NYSE: VZ), who is paying 6% with the possible upside appreciation.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
