The Economy May -
by Guy Baker
THE ECONOMY
Based on the data that came out this week, you could look at the economy from a Macro perspective or a Micro perspective and reach very different conclusions. Let's start by looking at the macro level and then work our way down to themicro perspective.
The Macro View – Overall, things don't look too bad. Sure, things could be a lot better, but we're a long way from the total gloom and doom so many pundits seem to be spreading these days. Let’s looks at GDP, new home sales, and durable goods.
GDP growth was revised upward for 1Q 2008 from +0.6% to +0.9%; not much of a gain, but more evidence the economy isn't in a recession. Consumer spending, the biggest piece of our GDP grew +1%, the slowest rate since 2001, but still positive, nevertheless.
New home sales rose +3.3% in April. If you read the reports, you would think everyone was in foreclosure and all new homes sales were stopped. When was the last time you heard a positive figure being reported for the housing sector? Also, it was the first increase in sales in six months.
Orders for durable goods fell in April, but much less than expected. Non-military spending was actually up +4.2%, the highest level since December.
From the mountaintop, then, the economy seems to be plugging along; trying hard to gain some traction and momentum. It may be heresy, but it is possible those interest rate cuts and stimulus payments will be just what we need to get things moving again.
The Micro View – This view concentrates on the deep undercurrents that have not made 
it to the surface yet. If you only look at the big picture, you may miss some of the underlying trends that are unsettling. Personal income and consumer spending, personal savings and unemployment are all pointing to potential problems.
While both personal income and spending gained +0.2% in April, it is down from +0.4% in March. Wages and salaries actually declined as sources of income. One source noted income gains were "swallowed" by inflation. The folks at the Dismal Scientist (http://www.dismal.com/) stated, "consumer spending has nearly stopped growing," and "consumers are particularly cutting back on big-ticket durable goods."
Personal savings was steady at 0.7% - only seventy cents out of every $100 of disposable income, way below historical standards. This indicates consumers are struggling to stay even with their bills. Rising energy and food prices certainly will affect consumers and their ability to save in the near future.
Initial jobless claims remained higher than normal at 372,000 for the week. So the economy is giving back a lot of the jobs created in recent years.
Looking at these three items, it's not too surprising the Conference Board's index of consumer confidence fell to its lowest level since 1992. Every analysis has said the consumers have driven economic growth and kept the economy vibrant. If consumers are worried about the economy, their jobs, and inflation, this portends a long term problem for the economy that is likely not to change until energy prices are under control. At street level, it's hard to blame them for being relatively pessimistic.
THE MARKETS
We all have heard the cliché “Two steps forward, one step back." Well, the markets seem to be reversing things a bit so far this year. Every positive movement like we had last week seems destined to be followed by declines that have kept us in negative territory overall for 2008. Last week, however, the Dow [+1.27% (May); -4.72% (YTD)], the S&P 500 [+1.78%; -4.63%], and the NASDAQ Composite [+3.19%; -4.89%] all gained for the month. (Compare this to BJIA portfolios which are even for the year through the end of May)
With consumer spending flat, savings low and consumer confidence very low, what caused the averages to advance? Some positive news from Dell (DELL) and optimistic signs from the financial sector were probably the main reasons. JP Morgan Chase acquired Bear Stearns and Bank of America signaled that it was going ahead with its acquisition of Countrywide Financial. Any positive news from the big banks and brokers is surely welcome these days given the extent of the subprime crisis and the credit crisis.
Not too surprisingly, the price of Treasury securities declined and yields moved higher. As the private sector stabilizes, we can expect the demand for ultra-safe government bonds to weaken, and their yields to increase. If so, buying bond funds now with these increasing rates over the next six months or so would be a loser. This is why BJIA uses short term government instruments.
Mortgage rates edged up at the long end, but they're still lower than they were at the beginning of 2008. If you can qualify for a mortgage on the basis of income, credit score, and down payment, there are a lot of attractive loans out there. We just started a mortgage company, First Nations Financial. So if you are interested, let us help you with your refinancing.
The US dollar improved quite a bit last week versus both the Euro (€) and the Japanese Yen (¥), but continued to trade in the mid-$1.50 range versus the European currency. This has been where it's been most of this year. Opinions here and in Europe are about equally divided as to whether the dollar will hold at this level or lose more value. No one expects it to improve dramatically any time soon.
Crude oil prices dropped, which probably helped the stock market, but gasoline prices surged by the largest one-week amount in quite a while, up fifteen cents nationally to just below the $4 per gallon level. That figure seemed impossible just a few months ago to most people except for places like Rodeo Drive in California, where even the Hollywood celebrities are beginning to complain.
Unfortunately, the forecast by Goldman Sachs is that oil would hit $140 per barrel this summer, and could go as high as $200 per barrel by the summer of 2009. Word from friends in Europe say there have been numerous strikes and demonstrations protesting high fuel prices and putting increased pressures on governments to "do something."
Most people are unrealistic in their expectations and demand. They want lower prices and think something should be done. But what? A reduction in taxes on gasoline is a band-aid approach that won't solve the world's long-term energy problems. World demand for oil is increasing rapidly (China and India), much more rapidly than new sources of supply.
PERSONAL FINANCIAL PLANNING – Common Concerns
Read the following and answer the question: What country do these facts refer to?
- "Airlines reduce flights as fuel costs take bigger bite"
- "Recession fears grow"
- "Home prices fell 4.4% year to year in May"
- "Fuel costs dampened growth in April's passenger traffic"
Sound familiar? These stories relate to various countries in Europe, but they would be all too familiar in the USA as well.
The point here is that, in an increasingly integrated and global economy, someone's problems (and benefits) soon become everyone's. There is less and less isolation and remoteness; privacy and secrecy are eroding. In this Internet-based age, no amount of government regulation can stand for long against the waves of information and data that wash around the world each day.
For example, there was a story about the problems troubling Mideast gulf nations as they tried to boost oil output. These supposedly ultra-rich states were complaining about higher production costs and transportation problems just as if they were a mid-sized oil producer in the U. S.
So what? "What does all this mean to me?" Simply being aware of these circumstances isn't enough; we need to integrate the knowledge and understanding into portfolios and decision-making.
One way is to increase holdings in international and global mutual funds. BJIA has on average 30% of the equity holdings in the international sector. Is this risky? Not really. Overseas investments have been the best-performing sector in each of the last six years. Having an international aspect to the portfolio has been an important contributor to return and the domestic market has struggled.
Bottomline, staying the course and continuing to invest in a diversified portfolio has been successful, even with the chaos of the market. Ask yourself this question. Do you think the market will be lower or higher in ten years? If you believe markets will be higher, then being even on your portfolio is a great place to be. When the markets start to climb again, these portfolios will benefit from 100% of the growth. Investing today is not for the faint of heart.
Thanks for your confidence in Baker Jensen Investment Advisors.
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