In a report to be released this week, the Obama administration will boost its 10-year projection for the federal budget deficit to about $9 trillion – an increase of roughly $2 trillion, or 29%, from its prior projection, Fox News reported over the weekend, citing a source from the Office of Management and Budget (OMB).

The new cumulative deficit projection – for 2010-2019 – replaces the administration’s previous estimate of $7.108 trillion. Changes in budget projections – whether they result in a surplus or a deficit – are often refined as economic conditions change. This new projection was necessary because the recession has gone on for so long, causing federal tax receipts to plunge – and because the economic rebound will be prolonged and weak, resulting in lower forecasts for future federal revenue.

Although most of the news media focuses on the Obama administration’s $787 stimulus measure, the fact is that the federal government was pushing forward with nearly $12 trillion in rebound-related financing commitments, Money Morning reported this spring.

The administration earlier this year predicted that unemployment would peak at about 9% without the financial-jump-starting initiatives and 8% with them. But U.S. joblessness zoomed skyward anyway, and stood at 9.4% last month, although many economists now say that a double-digit unemployment rate – one of 10% or more – is easily possible.

The nation’s debt now stands at $11.7 trillion. In the scheme of things, that’s more important than talking about the deficit, which only looks at a one-year slice of bookkeeping and ignores previous debt that is still outstanding.

Back in June, the non-partisan Congressional Budget Office (CBO) predicted that the federal deficit would reach $1.825 trillion this year. The CBO and the Obama administration will tomorrow (Tuesday) separately release new budget-deficit predictions. Last Wednesday, a senior White House official, speaking on the condition of anonymity, told The Associated Press that the administration estimate would reach $1.58 trillion – or triple last year’s deficit.

The report for the budget year that ends Sept. 30 also will predict Washington to spend $3.653 trillion this year, although revenue will reach only $2.074 trillion, the unnamed senior official told The AP.

“Whether it’s $1.6 trillion or $1.8 trillion, it’s pretty bad,” said Robert Bixby, executive director of the bipartisan fiscal watchdog The Concord Coalition, told Fox News. “I hope no one tries to spin that as good news.”

Total U.S. debt has soared to $11.7 trillion (the budget deficit is the “shortfall” in the annual deficit, while the debt is cumulative), having balloned to that level as a result of the multiple annual deficits that have become the norm, it seems.

Market Matters

Just who is the world’s great economic superpower these days?  At times, it seems, “as China goes, so go the world equity markets.”  Early in the week, the Shanghai Composite Index (SSE) suffered its largest percentage decline since late 2008, with the index plunging more than 20% for the month on concerns about the sustainability of China’s recovery.

The global markets watched as the Japan, Europe, and the U.S. indexes followed the SSE downward.  By mid-week, however, all eyes were back on the domestic market as another sell-off in China was overshadowed by signs of growing U.S. economic strength and reports of enhanced energy demand.

The global bailout plans moved into a new stage as the Swiss government relinquished its control over banking giant UBS AG (NYSE: UBS) by selling off its investment for a $1.13 billion profit, or a 30% annualized return.  While the U.S. government has yet to reap similar benefits, several major banks have paid off their Troubled Asset Relief Program (TARP) loans and the CEO for one of the poster children for financial distress, American International Group Inc. (NYSE: AIG), announced that his firm should be able to pay back the government and may even be able to “do something for shareholders as well.”

While many auto dealers complained about the rebate process on the “Cash for Clunkers” program, General Motors Corp. (NYSE:GRM) stepped forward and will begin providing advances to participants who continue to wait for the government to move through its traditional red-tape.

The healthcare debate (and political infighting) raged on (complete with widespread town hall civil disobedience).  Rumors that the government would remove its public-health-plan option sent related health-care stocks soaring early in the week, though the jury remains out as to how this will really play after U.S. President Barack Obama guaranteed approval of an overhaul and then bashed congressional Republicans for their efforts in blocking any plan whatsoever.

On the earnings front, the housing sector received mixed signals as Home Depot Inc. (NYSE: HD) bested expectations, while rival Lowe Companies Inc. (NYSE: LOW) fell short and reduced its outlook. Cost-cutting was widespread among retailers as The TJX Cos. Inc. (NYSE: TJX), The Gap Inc. (NYSE: GPS), and even Target Corp. (NYSE: TGT) benefited from increased margins, though sales remained lackluster at best.

Hewlett-Packard Co. (NYSE: HPQ) struggled in its PC and printer-business segments, though management expects a healthy rebound in its fiscal fourth quarter.

Fixed income benefited from some early “flight-to-quality” trades and a report that showed strong foreign demand for U.S. Treasuries in June (despite ongoing rumors to the contrary).  Stocks fell sharply in sympathy with the China sell-off, though buyers reemerged in a big way on positive signs from the earnings and economic reports.

Likewise, oil prices shook off some early week negativity and surged to 2009 highs, as a surprising plunge in inventory levels revealed growing demand – perhaps to coincide with the beginning of a global economic rebound?  On that note, U.S. Federal Reserve Chairman Ben S. Bernanke’s comments about the prospects for recovery (though slow at first) were extremely well-received as investors seemed to all but forget about following Shanghai and the U.S. markets assumed the leadership role once again.  The major domestic indexes shrugged off the weak start and pushed to new highs for the year.

Market/ Index	Year Close (2008)	Qtr Close (06/30/09)	Previous Week (08/14/09)	Current Week (08/21/09)	YTD Change
Dow Jones Industrial	8,776.39	8,447.00	9,321.40	9,505.96	+8.31%
NASDAQ	1,577.03	1,835.04	1,985.52	2,020.90	+28.15%
S&P 500	903.25	919.32	1,004.09	1,026.13	+13.60%
Russell 2000	499.45	508.28	563.90	581.51	+16.43%
Global Dow	1526.21	1,629.31	1,803.83	1,819.50	+19.22%
Fed Funds	0.25%	0.25%	0.25%	0.25%	0 bps
10 yr Treasury (Yield)	2.24%	3.52%	3.56%	3.56%	+132 bps

Economically Speaking

In addition to the Home Depot and Lowe’s earnings reports, housing news was prevalent during the week and the results were somewhat confusing.  The National Association of Home Builders reported that its Housing Market Index climbed for the second month in a row and reached its highest level in over a year.  Likewise, applications for mortgages increased for the third straight month on declining interest rates.

However, foreclosure rates remain on the rise and, according to the Mortgage Bankers Association, 13.2% of mortgages are delinquent or worse (in foreclosure); in fact, subprime mortgages are no longer the only area of concern as the unsettled labor picture has prompted homeowners with strong credit to fall behind on their prime mortgages as well.

Though housing starts fell in July, the decline was entirely attributable to apartment activity and construction of single-family homes actually rose for the fifth straight month.  Additionally, existing home sales in July surged by more than 7% as buyers took advantage of the misfortunes of others (in foreclosure), though prices continue to fall because of transactions related to these distressed properties.

In non-housing news, separate regional reports from the New York and Philadelphia Feds boosted the outlook for the domestic manufacturing sector and the overall economy.  Wholesale inflation remained benign as the producer price index (PPI) fell by a wider-than-expected 0.9% in July and prices have plummeted over the past 12 months by the largest percentage (6.8%) since records have been kept, dating back to 1947.

Be forewarned: Oil just hit a 2009-high.

U.S. Federal Reserve policymakers met for their annual conference and Fed Chair Bernanke shared a favorable assessment about the recovery process from “the most severe financial crisis since the Great Depression.”  Of course, Bernanke tempered some of his remarks and reiterated that, while the recession seems to be coming to an end, the rebound would likely be slow, with unemployment remaining a concern.

Bernanke also spoke of the need for financial regulatory reform in order to ensure the current financial debacle isn’t repeated.  The Fed also extended its Term Asset-Backed Securities Loan Facility (TALF) lending program in order to help stem the potential “challenges” that remain among commercial mortgage-backed securities.

Weekly Economic Calendar

Source: In the Race for a U.S. Economic Rebound, Growing Debt and Budget Deficits Remain the Biggest Possible Roadblock

After all, just consider that:

• The U.S. unemployment rate just spiked to 9.4% for May, up from 8.6% in April, meaning the nation’s jobless rate is now at its highest level in more than 25 years.
• Throw in the fact that the current jobless rate does not include people who have taken part-time jobs below their skill levels to make ends meet (a little-referred-to situation calledunderemployment), and the “real” unemployment rate soars to a staggering 16.4%.
• More than 6 million workers have lost their jobs since the recession started in December 2007, meaning one in 20 jobs has disappeared – many of them forever.
• A total of 14.5 million Americans are now unemployed. The number of long-term unemployed (those without jobs for 27 weeks or more) recently increased by 268,000 to 3.9 million and has tripled since the start of the recession.

But that’s not the worst of it. Experts are projecting an economic rebound that will take hold late this year – early next year at the latest. At the same time, however, economists are starting to whisper about a “jobless recovery,” an upturn in which the economy and corporate profits advance, but virtually no new jobs are created to overcome the years of layoffs that preceded the rebound. In fact, the U.S. Federal Reserve said the U.S. economy might not return to its “normalized” unemployment rate of roughly 5% until 2013, Argus Research Chief Economist Richard Yamarone wrote in a recent report.

So while there appears to be some light at the end of the tunnel for the economy in general, the outlook is somewhat more challenging for those who are unemployed, underemployed, or who are currently working but who still harbor dreams of “career advancement.” As bleak as this all may sound, jobseekers (both employed and unemployed) shouldn’t be deterred: With a sound strategy, and four simple secrets, it’s still possible to survive – and even thrive – in a jobless recovery. We’ve labeled them as the “Four P’s” – Plan, Pinpoint, Pounce and Persevere.

Planning to Win

It’s a well-worn adage, but it’s also a truism: Those who fail to plan are essentially just planning to fail. Have a plan to keep your life on track while you see that new career opportunity.

When “joblessness” strikes, it usually does so in one of two ways.  It either catches you completely off guard – often with a hastily called series of employee meetings, or that Friday afternoon summons to the boss’ office – or you’ve seen the handwriting on the wall (or in your company’s financial statements), and so you knew it was only a matter of time. Either way, if you let the search for a new job consume 100% of your life, you may end up losing more than just a regular paycheck.

By far, the largest consequence when you lose a job is the loss of regular income. Having a plan to deal with this change is just as important as getting a new job.

To create this plan, start by asking this question:  Do you have enough cash on hand, or can you access the needed funds, to pay all your bills, while you’re looking for a job?

If your answer is “yes,” congratulations.  You’re much better off than the majority of people losing jobs right now.  For the purposes of this article, go ahead and skip to the second “P” – Pinpoint.

But if you’re like most unemployed Americans, you depend on a regular paycheck to meet your financial needs.  Once that income stops, you’re going to have to make some difficult choices based on your financial situation.  Waste no time in taking the steps to address these issues head-on by:

• Contact your creditors:  With such liabilities as a credit card, credit line, or outstanding medical bills, if the creditor in question doesn’t have a program in place to suspend your account for a couple of months while you track down that new job, then they likely have a program to reduce the interest rate and modify your payments.  Believe it or not, they’ll work with you, especially right now.  The last thing they want is for you to default on the loan.  The earlier you contact them, the better off you’ll be – especially in the long run.

• Micro-budget yourself:  Figure out what you can and cannot do without.  The longer your job search lasts, the easier it becomes to do without cable television, dry-cleaned clothes, making that weekly sojourn to your local restaurant, or stopping every day for that morning muffin and coffee. Scrutinize your bank statement. Consumers are often surprised how often they’ve accumulated automated payments or account debits – which they’ve forgotten about. Look closely: If you’re still making regular payments to magazines, dating services, TV-based services, or even mutual funds, look at those you can stop.  You’ll be surprised at what you can eliminate from your monthly expenses once you know what’s actually being paid for.

• Seek Alternative Income: Do this immediately. Access other income sources as soon as you can.  If you’re eligible, apply for Unemployment Compensation; sometimes it can take weeks for this to kick in, so the sooner you apply, the sooner you can begin to collect an income.  If needed, find another source of income – you’ll be surprised how many opportunities are out there for people who are willing to take on shifts outside of the 9 to 5 norm.

As you work through these necessary tasks, make time to jumpstart your job-hunt, as well. Unless you’re forced to take the first real offer that comes your way, don’t be afraid to make the most out of this situation by including your dream job in process. The worst that can happen is that you don’t land that particular job.

But you just might do it.

Just as with the “Plan” phase of your job search, you’ll create the best chance for success in the job-hunting phase if you “Pinpoint” exactly what you’re looking for.

Pinpointing Success

By pinpointing your objectives, you have to understand just where you want to be. But you also need to pinpoint just how you intend to get there, and to be realistic about what you’re up against. It’s the last of those three that’s often the toughest to see and understand. So let’s take a closer look.

Understanding the Challenges: As we noted just moments ago, it’s not too difficult these days to get a pretty good idea of the overall unemployment scene: The official unemployment rate was last this high in 1983, and it’s going to get higher before it hits its apex and heads lower. But you also need to understand just what the hiring situation is in the specific industry you wish to work in – as well as the specific geographic market where you hope to work.

On an industry-wide level, The U.S. Bureau of Labor Statistics Web Site (www.bls.gov) is a good place to start.  By checking out their monthly Economic Statistics reports, you can get a clear picture of industry-specific performance in the U.S.

For example, in the Employment Situation Summary for May 2009, we can see that both the education/health services and leisure/hospitalitysubsets of the service-providing industry added jobs last month: 44,000 and 3,000 jobs, respectively.

Whereas, the goods-producing, manufacturing, and service- providing sectors were down 225,000, 156,000 and 120,000 jobs for the month, respectively.
By combining industry-wide knowledge with more specific resources available for your cities and states on Web sites provided by local newspapers (in my local area, that would be The Baltimore Sun or The Washington Post, for example), social media networks (like Craig’s List or Facebook) and jobs sites (such as Monster.com orCareerbuilder.com), you’ll gain a much better idea of the job market available to you right now.

Define Your Goal: This is the point most people start at when job hunting because they think it’s the easiest to knock out.  Well, in part, they’re right.  There’s no better authority than you when it comes to knowing what you can do or want to do.

But there’s a mistake most jobseekers make – a mistake you need to avoid at all costs: Don’t sell yourself short, and don’t “pigeon-hole” yourself by thinking that your skills will only allow you to do a very narrowly defined job. Granted, for certain specific trades – such asHVAC installation and service, plumbing, or auto repair – you may be looking for highly specialized work.

In Corporate America, however, people who’ve worked in the divisions or departments essential to business – such as marketing, sales, human resources, logistics, or operations – jobseekers often don’t see those additional possibilities. If someone has spent the last 11 years working in HR for an accounting firm, they may not realize that they have the skills or experience needed to do a similar job within a school system, a hospital or health-care center, or a startup technology firm. And they could end up missing out on some good-paying and career-rejuvenating opportunities in the process.

That’s when the marriage between knowing what you’re up against and know what you want to do becomes critical.  Once you’ve identified which industries are the go-to segments for employment, you just have to look for the companies within that industry that offer positions in which you’ve had all of that experience.  Sometimes, though, you may need to persuade the decision-maker for the position in question that your experience in one industry lends itself to the other.

And finally, understanding of the challenges you face may also give you an entrée into the industry that houses your dream job.

Of course, you need to be somewhat realistic, even as you act with enthusiasm and aggressiveness. For example, if you always wanted to be a major league relief pitcher, but are now 34 years old with eight years of accounting experience to your credit, the chances are pretty good that the New York Yankees aren’t going to be phoning you to offer a mound tryout. However, the Bronx Bombers – like any other business – do have an accounting division, and your experience may be a perfect fit for what they’re looking for.

Remember that your sudden joblessness may give you the opportunity to get into an industry that you’ve always wanted to be in.  Now, though, you have the requisite experience within one of the departments common to every company, that makes you a much more attractive candidate for that position.

Now, you just have to be able to seize an opportunity, once you’ve identified it.  And that brings us to the third “P” – Pounce.

Pounce on That Possibility

Too many job seekers begin their search in an all-out desperation mode – thinking they have to find a job as soon as possible.  Even if that’s true in your case, if you’re not prepared to make the most out of every job-seeking situation you enter, you may end up blowing the best chance – at the best job – that you’ll ever see.

So, take a page from the Boy Scouts: Be prepared – to pounce.  That is, prepare for the best possible scenario, as if you’re going to hit the job-seeking jackpot.  For example, what happens if the first company you contact asks you to send your resume and references right away, so the chief executive and the head of HR can look them over this morning and then have you in that afternoon? If you aren’t prepared, you can’t pounce on the prospects that may come your way.

Well, if your answer to that request is “I can e-mail whatever you’d like right now.  What time this afternoon would you like to meet?” you’re on your way.  But if the last time you looked at your resume was six years ago, during your last job search, or you last spoke to your best prospective reference three years ago (and don’t even know where they’re working today), chances are you’ll still be job hunting long after someone else is happily seated (and working) behind the desk that should have been yours.

So even before making that first call or typing in that first word for an online search, make sure that you have the following information updated, available, and ready to be sent at the drop of a hat:

1. Resume: More than just having it updated, make sure that you know it backwards and forewords.  Be able to explain gaps in your employment history, or why you’ve recently jumped from job to job.  The best plan: Have a general template that you can individualize or customize in order to pounce on a specific job opening.
2. Cover Letter: In many cases, the cover letter is just as important as your resume.  It should be your Sports Centerhighlight reel, but it should also be concise. Like you have with your resume, prepare a cover letter template, so that you can customize information for different openings, catering your comments to specific requirements or requests.
3. References: At a minimum, you should have the names and contact information (phone and e-mail) for three business and personal references.  For businesspeople, include their titles and company names.
4. Samples of work: For positions in such “creative” fields as copywriting, graphic arts, architecture, or industrial design, to name a few, you’ll be asked to submit samples of your work.  Make hardcopies and electronic files of whatever you can, so that you can submit them in multiple formats.  Never give away originals, thinking that they’ll be returned – chances are, you’ll never see them again.

In addition to having the documents and materials above ready to go with a moment’s notice, you should also have the following information and materials readily available:

1. Your schedule for the week:  If you’re asked when you’re free later in the week, you need to be able to answer that question immediately.  The worst thing you can do tell someone that you’re meeting with at that moment, or that you’re talking with on the phone, that you’ll get back to them with that information.  You may not be able to connect later, for a variety of reasons.  Then when you do re-connect, you window of opportunity may have closed.
2. Clothes for an interview: Some laugh at this suggestion as oh-so-obvious, but you’d be surprised how many times people will tell us that they were called in for an interview – only to realize that their best suit was still rumpled from their last interview, three weeks ago. You don’t have to go out and purchase a new suit for every interview opportunity, but if you’re asked to come in to talk that day, and you don’t have time to wash, iron or otherwise clean appropriate clothing, you run the risk of making a bad impression – and losing the job.

Don’t Give Up

It goes without saying that this is one of the toughest and most-challenging periods U.S. job seekers have faced. But it also goes without saying that you can’t give up. That’s why the fourth of our four insights – the “Four P’s” is perseverance. Hope for the best, but don’t be discouraged if no job offer is immediately forthcoming. Prepare for the long haul by following the game plan we’ve identified, and use that as a survival kit that will get you through to the long run, where those who persevere usually win.

Source: The Four Secrets to Career Success in a Jobless Recovery

[Editor's Note: The first in an occasional series that looks at unique strategies for navigating the jobless recovery.]

• A stronger dollar and falling oil prices helped U.S. stocks to suffer a sharp drop yesterday (Monday), as investors continue to find it difficult to see real signs of an economic rebound, Reutersreported. All three major U.S. indices – including the Dow Jones Industrial Average and the Standard& Poor’s 500 Index, dropped more than 2%. Hardest hit were the shares of energy companies such as Chevron Corp. (NYSE: CVX), which closed down more than 2% at $71.08. The dollar gained against all 16 of its major counterparts currencies, except for the Japanese yen, after Russian Finance Minister Alexi Kudrin said it was too early to consider an alternative to the greenback following a Group of Eight meeting. Of note, the euro fell versus the dollar following the European Central Bank said commercial banks in the 16-country euro region may lose an additional $283 billion by the end of 2010, Bloomberg News reported.

• Homebuilder confidence has dipped by one point, according to theNational Association of Home Builders (NAHB)/Wells Fargo Housing Market Index. “The outlook for home sales has improved somewhat in recent months, due largely to implementation of the first-time homebuyer tax credit and gains in housing affordability,” said NAHB Chairman Joe Robson, a home builder from Tulsa, Okla. “However, looking forward, homebuilders are facing a few headwinds, including expiration of the tax credit at the end of November; a recent upturn in interest rates; and especially the continuing lack of credit for housing production loans.” The index is based on a monthly survey of 548 homebuilders.

• The International Monetary Fund (IMF) raised its outlook for the United States and called for steps to reduce concern about increasing public debt and inflation, Bloomberg News reported. The IMF forecasts the United States’ gross domestic product (GDP) will contract 2.5 % this year before growing 0.75% next year, according to a statement today after an annual staff analysis the world’s largest economy. Previously, the IMF’s World Economic Outlook report, released in April, had the United States’ economy contracting 2.8% this year, before stalling in 2010.

• President Barack Obama yesterday (Monday) told the largest doctors group in the country that changes are needed in areas from insurance to payment procedures to lower costs and cover the uninsured, MarketWatch.com reported. “What I am trying to do and what a public option will help do,” he said to the American Medical Association, “is put affordable health care within reach for millions of Americans.” The group said last week it opposes any public plan that forces doctors to participate or expands Medicare or pays Medicare rates. In his weekly radio address on Saturday, Obama laid out a proposal to cut $313 billion in government health spending, saying the reductions in Medicare and Medicaid payments to health-care providers would increase efficiency and the quality of care, while setting aside about $950 billion for reform over the next 10 years.

• In a sign that more Americans are curbing their discretionary spending, Six Flags Inc. (OTC: SIXF) filed for Chapter 11 bankruptcy protection on Saturday, Reuters reported. The New York-based company said the move will deleverage its balance sheet by $1.8 billion and eliminate $300 billion in redeemable preferred stock obligations. Day-to-day operation of its 20 parks will not be affected, and the filing “paves the way for a full revival of the company,” Chief Executive Officer Mark Shapiro said.

Source: Investment News Briefs Tuesday, June 16, 2009

Investors believe they’ve seen enough evidence that the U.S. economy may be bottoming out to ignite one of the strongest stock-market rallies in years. After closing at a 12-year low on March 9, the Standard & Poor’s 500 Index has soared 32%. The  Dow Jones Industrial Average has zoomed more than 27%, and the tech-laden Nasdaq Composite Index has rocketed 34%.

In a March 15 interview on the CBS show, “60 Minutes,” U.S. Federal Reserve Chairman Ben S. Bernanke said the United States escaped a repeat of the 1930s Great Depression. The economic downturn would hit bottom this year, with an actual recovery starting in 2010.

“And I think as those green shoots begin to appear in different markets, and as some confidence begins to come back, that will begin the positive dynamic that brings our economy back,” Bernanke told viewers.

But now those “different markets” appear to be sending some troubling signals.

Green Shoots Yield to Red Ink

Last week, Mexico reported that its economy contracted at an annualized rate of 21.5% in the first quarter. The report followed equally dismal reports from Japan, Germany and the United States. Japan – the world’s second largest economy – said its gross domestic product (GDP) contracted at a 15.2% clip, its worst performance since 1955. Germany’s economy shrank at a 14.4% annualized pace, its worst showing since 1970.

In fact, Europe as a whole stumbled in the first quarter, as economic activity in the 16-nation Eurozone fell the most in 13 years. The Eurozone’s economy contracted by 2.5% in the three months that ended March 31.

At home, the U.S. economy contracted by a 6.3% annual rate, with the U.S. Federal Reserve predicting “a gradual recovery” that starts in the second half of this year.

If uncertainty continues to be the watchword, how should investors position themselves?

Staying on the sideline may appear safe, but it’s actually been proven through research to be a risky strategy. For instance, after looking at S&P 500 returns between 1993 and 2007, Davis Advisors Funds found that investors who remained invested and didn’t try and “time” the market ended up being much better off than investors who moved in and out of the market – often missing strong days in the market, as a result, says Wellcap Partners Managing Partner Alan Schram.

Investors who remained invested received an average annualized return of 10.5%. But investors who missed just the best 30 trading days over this stretch saw that return drop all the way down to 2.2%. And the more strong days an investor missed, the worse the returns got, Schram says.

Here’s a summary of the results of that study, looking at the investor’s action and the average annual returns that resulted:

• Stayed the course: 10.5%.
• Missed the 10 best days: 7.1%.
• Missed the 30 best days: 2.2%.
• Missed the best 60 days: (-3.2%).
• Missed the best 90 days: (-7.4%).

Nevertheless, there’s still about $8 trillion sitting on the sidelines – enough to create a sustainable market really should the “green shoots” grow into a full-fledged recovery.

Are Income Stocks the Antidote in a Sick Economy?

OK, so it pays to stay invested – but invested in what? And what if the hoped-for recovery ends up getting blunted? After all, those “green shoots” could easily wither on the vine.

According to Money Morning Contributing Editor Martin Hutchinson, seeking out stocks with high – but sustainable – dividend yields is the perfect strategy for an imperfect market.

Stocks with high-dividend yields are one part of a two-element investing strategy that Hutchinson says can create “permanent wealth” for investors who are willing to follow it through. Gold is the other key part.

Income From Dividends: One Pathway to Permanent Wealth

Dividend payouts are a way that a company’s leadership can signal its confidence in the future, Hutchinson says. A company has to have profits and – just as important – cash flow to finance the quarterly payouts, so a company that is maintaining a high yield is basically letting its investors know that it’s upbeat about its future.

Management is “basically saying to you that we’ll be able to keep paying this going forward,” which is a bullish sign, Hutchinson says.

Income is a key component of any investment strategy.

“Dividends create wealth in two ways. First, they provide cash flow that you can either use for living expenses or to reinvest: That means there’s no more having to sell shares, often at a depressed price, to meet your monthly bills, or to finance a vacation or home remodeling,” Hutchinson says. “Second, if you buy shares with high dividend yields, there’s a good chance that the market will eventually notice the superior [dividend] payouts, and revalue the shares so that their dividend yield is back down around the market’s average. For a dividend yield to go down in this manner, the stock price has to go up. Once that happens, you have received dividends and capital gains.”

While dividends provide income stability, gold provides a hedge against the inflationary pressures that are virtually certain to emanate from the massive amounts of money that the federal bailout and stimulus plans are injecting into the U.S. economy.

The recent surge in the prices of both gold and oil are proof that the markets expect inflation to escalate.

“Gold and gold-based investment – such as gold-mining companies – are an important part of a permanent-wealth-investment strategy because of gold’s historic function as a store of value that is impervious to inflation. At the moment, when inflation is low but there is a big danger of it rising, gold investments are an essential protection for permanent wealth investors,” Hutchinson says.

Source: As Key Global Markets Stumble, Gold and Dividend Stocks May Keep Investors on Course

So far, American taxpayers have shoveled out almost $600 billion in Troubled Asset Relief Program (TARP) funding to prime the economic pump and get the banks lending – and people spending – again.

Yet a report by The Wall Street Journal shows the banks are lending less money than they did five months ago. And further research shows no matter how much TARP money the government pumps into the U.S. banking system, American consumers may just not be ready to drink from the trough – a sobering reality that could doom the chances of a quick economic rebound.

Meanwhile, the banks’ perceived reluctance to lend – coupled with their lavish spending on bonuses and management perks, has the the Obama administration on the defensive, sensitive to skepticism about the government’s ability to revitalize the banking system.

Bank Lending Still Anemic

Despite government pronouncements to the contrary, pumping billions of dollars into the financial sector has not had the desired result, meaning lending hasn’t accelerated. In fact, according to the recent Wall Street Journal analysis, initial loans and refinancing outlays at the nation’s big banks dropped by 23% from October to February.

According to the data, 19 financial institutions made or refinanced a total of $226.3 billion worth of loans in October. That figure plummeted to $174.2 billion for February, The Journal reported.  In fact, the total dollar amount of new loans declined in three of the four months the U.S. government has reported the data, and all but three of the 19 largest TARP recipients originated fewer loans in February than they did in October.

For its part, government officials say the current situation could have been a whole lot worse without TARP funding.

Just last week, the U.S. Treasury Department praised “the relatively steady overall lending levels.” Without those capital injections, “lending would have suffered a far smaller total volume of loan originations in February than January,” the Treasury Department said.

But bank executives defended their lending levels by saying the reason behind a decline in new loans, refinancing deals and modifications of troubled loans is the lack of demand from consumers and businesses – and not the banks’ willingness to lend.

JPMorgan Chase & Co. (JPM) showed one of the biggest lending declines, dropping from $61.2 billion in October to $39.7 billion in February – a drop of 35%.  But JP Morgan executives explained the bank made more than $151 million in loans in the first quarter, “despite the fact that loan demand has dropped dramatically.”

Commercial lending slid by about 40% and may have been depressed by a partial thawing of the bond markets, where some corporations raise money instead of borrowing it from banks. About $70 billion of corporate bonds were issued in February, up from $21.4 billion in October, according to Thomson Reuters.

The figures show that consumer loans, especially mortgage refinancings, account for a large portion of bank lending. Nearly half of February’s lending went to consumers, up from about one-quarter in October.

But excluding mortgage refinancings, consumer lending dropped by about one-third between October and February. And because the United States has accounted for one-third of total growth in global consumption since 1990, any change in U.S. consumer behavior has profound implications, not just for the United States, but for the worldwide economy.

Increased Savings Rate Could Slow Rebound

Consumer spending is the engine of the U.S. economy, accounting for about 70% of gross domestic product (GDP). And in the go-go days of the early 21st century, U.S. consumer spending was in full swing.

U.S. households nearly doubled their outstanding debt to $13.8 trillion between 2000 and 2007, according to the McKinsey Institute. During that unprecedented period, personal consumption accounted for 77% of real U.S. GDP growth and personal liabilities reached an astounding 138% of disposable income.

But a shift occurred as the global financial crisis worsened at the end of 2008: U.S. households reduced their outstanding debt for the first time since World War II by curtailing spending and reducing borrowing.

In fact, recently released U.S. Federal Reserve data shows that outstanding consumer credit dropped from $2.95 trillion to $2.56 trillion in January.

But as consumer spending and borrowing plunged in recent months, the saving rate has rebounded, reaching 5% in January. And each extra point in the savings rate means more than $100 billion less in spending a year, according to a recent McKinsey study.

In fact, the study found that if consumers continue to reduce debt, the increased savings rate would result in $535 billion less consumption a year, a potentially serious drag on a nascent economic recovery.

Banks and Obama Still Not Out of the Woods

Looming over all this is the possibility that banks may need more government assistance in the near future in order to keep lending – even at the current depressed levels.

JPMorgan analyst Matthew Jozoff predicts banks could suffer another $400 billion in losses as a result of continuing credit deterioration, which could force policymakers to deploy yet another round of capital infusions.

Obama administration officials acknowledge that they may still have to ask Congress for more money in the future. Beyond the 19 big banks, which are defined as those with more than $100 billion in assets, the Treasury has also injected capital into hundreds of regional and community banks.

The most immediate expense may come in the next several weeks, when federal bank regulators complete “stress tests” on the nation’s 19 largest banks.  The tests are expected to show that at least several major institutions will need to increase their capital cushions by billions of dollars.

That could include Bank of America Corp. (BAC), a bank that many experts say probably should have been liquidated long ago.

In order to avoid another capital infusion, the government might elect to take equity in return for previous loans.  Converting the loans into common stock would increase the capital of big banks by more than $100 billion and give the government a large equity stake in return.

Of course, converting those loans into common shares would turn the government into the bank’s biggest shareholder – a move some critics see as a back door to nationalization. The move would also serve to further dilute the holdings of existing shareholders.

While the option appears to be a quick and easy way to avoid a confrontation with congressional leaders who are wary of putting more money into the banks, the administration would no doubt be heavily criticized for displaying such “socialist” tendencies.

[Editor's Note: In this second installment of a two-part look at whether the credit crisis continues to crimp financing for companies and consumers, Money Morning takes a look at bank lending. In Part I earlier this week, we studied venture-capital-investment trends.]

Source: A Look at Liquidity: The Real Reason Banks Aren’t Lending

For instance, a 5% to 6% contraction in first quarter gross domestic product (GDP) will look decent vs. the wrenching 6.3% decline the U.S. economy experienced in the fourth quarter. Mix in some still weak – but improving – corporate earnings season and there may be reason to hope that U.S. President Barack Obama’s prediction of an economic rebound in 2010 may not be off target after all.

Eddie Cohen, a market historian who is chief investment officer for Stavis & Cohen Financial, a Houston-Texas financial-management firm, points out that the U.S. stock market has endured three protracted bear markets since 1900 (1906-1921, 1929-1942 and 1966-1982) and sees evidence that the United States may be ensconced on one of those periods again.

While Cohen sees some positive indicators, he continues to advise that caution (or even cautious optimism) be the order of the day.

“Plenty of questions still need to be answered before we can proclaim an end to the bearishness and a definitive market recovery,” Cohen said. “At least, we have started to see some rays of sunshine on the horizon, and that is encouraging.  Still, this environment is not the time to be a hero.”

But there are three significant wildcards at play here that could keep the market from sinking into an even deeper malaise – and that could, in fact, be a catalyst for higher stock prices and perhaps even an improved economy in the months to come. Those three wildcards include:

• There’s an estimated $4 trillion in cash in investors’ hands on the sidelines – capital that could be drawn in to further pump up the markets, should the recent rally continue.
• The federal government has already committed to funding $11.6 trillion in stimulus initiatives, and the sheer magnitude of that government intervention could play a substantial role in determining just how long this downturn lasts – or how quickly it ends.
• Stocks are, in many cases, currently trading at levels not seen since the late 1990s, meaning the market is dangling bargains too enticing to ignore.

Cohen believes that investors need to remain cautious and to understand that market sentiment can literally turn on a dime, especially if the volatility levels remain high [there's some evidence that volatility has diminished somewhat in the past week, and is currently below what is usually expected for the start of the corporate earnings cycle]. However, the Texas investment advisor also foresees some potentially positive developments on the horizon and believes that patient long-term investors who are willing to ride out the short-term volatility may want to commit some money to stocks in profit from these low valuations.

Given that there is “an estimated $4 trillion in cash on the sidelines right now … as investors become more confident, some of these funds could potentially find their way into equities and help drive the markets higher,” Cohen said.

The Quarter That Was

When 2008 came to a close, investors hoped the nightmare had ended and some normalcy would return to the economy and the markets. It was not to be. During the first three months of the New Year, a $787 billion stimulus package, multiple blueprints for rescuing the nation’s banking system and a honeymoon period for a new presidential administration that was one of the shortest in U.S. history made it very clear that the nation’s economic nightmare was continuing.

Much of the data portrayed an economy in decline despite the promises by U.S. Federal Reserve Chairman Ben S. Bernanke’s that better times were coming. The U.S. Commerce Department initially reported that fourth-quarter GDP was down 3.8%, its worst showing in 27 years, though not as bad as many economists had projected. A few months later, however, Commerce Department analysts revised that statistic downward to 6.3% and confirmed that the recession had worsened.

Jobless statistics became the barometer for the nation’s declining economic health, as company after company announced major cutbacks. On Jan. 26 – in a single day so bad that it was labeled as “Black Monday” – about 75,000 jobs were eliminated ad the likes of Caterpillar Inc. (CAT), Sprint Nextel Corp. (S), Home Depot Inc. (HD), Texas Instruments Inc. (TXN), General Motors and others announced major job cuts. Even before that dark Monday, there had already been 170,000 job cuts announced that month – and that’s after a 2008 that saw the recession claim 2.6 million jobs.

“Some of the worst job losses are ahead of us, not behind us,” Wells Fargo & Co. (WFC) senior economist Scott Anderson told USA Today at the time.

One-time global giant Citigroup Inc. (C) fell briefly into penny stock territory and came within a heartbeat of nationalization as the U.S. government finally opted to inject more money into the former financial-sector stalwart. A late-quarter restructuring plan seemed to better position Citi.

Nor did the trouble stop with the banks. Two of the U.S. Big Three automakers – General Motors Corp. (GM) and Chrysler LLC – moved closer to bankruptcy as the government rejected the American carmakers’ plans for reorganizing. Indeed, the Obama administration even “suggested” GM’s CEO pursue other endeavors, and laid down serious guidelines regarding future intervention. Even so, bankruptcy may be unavoidable.

But then a funny thing happened on the way to Great Depression II. Citi, Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) each announced promising results for the first two months of the year, surprising investors and igniting a late-quarter stock market rally. In an interesting parallel development, a “surprise” announcement by Wells Fargo & Co. (WFC) last week added fuel to that already-existing rally in financial-sector stocks, and in the market in general.

Some confidence returned to the boardroom – at least within the healthcare sector – as major deals involving Merck & Co. Inc. (MRK) and Schering-Plough Corp. (SGP) ($41.1 billion) and Roche Holding AG (ADR: RHHBY) and Genentech Inc. (DNA) ($46.8 billion) moved forward.

Electronics retailing giant Best Buy Co. Inc. (BBY) reported better-than-expected profits as consumer activity suddenly picked up (at least, above the dismal levels of the fourth quarter). The credit markets began to thaw a bit as corporations issued new debt and the U.S. Federal Reserve offered up a plan to buy U.S. Treasuries as a way of keeping interest rates low.

Though the Dow Jones Industrial Average declined 13.3% for the quarter, March was its best-performing month since October 2002. The tech-heavy Nasdaq Composite Index declined 3.07%, but enjoyed a March that was actually its best month ever. The Standard & Poor’s 500 Index declined 11.67%.

Some of the late-quarter economic reports seem to reflect this brighter outlook. In manufacturing, for instance, factories continued to struggle as industrial production fell to the lowest level in almost seven years, though a favorable durable goods report offered some optimism as the first quarter came to a close.

Home sales likewise offered some cause for optimism, rising in February as buyers took advantage of low rates and a tax-break for first-time homeowners. Retail sales statistics were a bit better than expected – especially after removing dismal auto sales from the mix. And inflation – a much-feared foe with the level of government spending that’s taking place – remained well under control, even as talk of deflation also seemed to subside.

Stocks continued their strong run, even after the quarter closed. Since then, in fact, the Dow has rallied 6%, the S&P 8% and the Nasdaq 8%.

Sound Strategies to Follow No Matter Which Way the Market Moves

Nat Levy, a principal with Houston-based McNeil, Levy & Friedman LP, is a five-decade veteran of the financial-services sector, and has seen his share of uncertainty. In the near term, it rarely pays to prognosticate – so he doesn’t.

“I am unable to predict short-term market or economic movements and don’t know of anyone who can do more than guess at this,” Levy says.

Even so, at a time when many investors are talking about “new rules,” or “new realities,” Levy says it pays to stay the course.

The one prediction he will offer is that some investors will look back on miscues they made today with more than a little regret.

“Right now, we find ourselves in one of those “if only I had…’ periods,” said Levy.  “My one educated guess is that in five years from now we’ll look back and think “If only I had invested in this; if only I had remained invested in that, etc.’.”

Stavis & Cohen Financial’s Cohen points to the usual suspects like automakers and banks as industries that continue to face considerable challenges in the periods ahead.  While he sees signs of renewed housing activity in terms of new and existing home sales, he acknowledges that prices continue to fall each month, foreclosures are increasing, and the newly laid-off workers could exacerbate those trends.

Cohen – like Money Morning – believes that commercial real estate may be the next shoe to drop; vacancies are increasing, rents are under pressure, and banks may not be willing to loan large sums of money to related companies looking to refinance.

Because inflation could become a problem, Cohen says investors should have some exposure to gold in today’s environment.

“The unprecedented level of government intervention has added significant liquidity to the marketplace, but, ultimately may lead to higher levels of inflation,” he said. “Gold can serve as a potential hedge against such price pressures.  Additionally, as the country’s debt and deficit positions mount, the dollar could remain under pressure and gold can be viewed as an insurance policy against a weak currency and the uncertain times faced today and in the future.”

Cohen states that investors can invest in gold directly by purchasing bullion or through funds or exchange-traded funds – one being the SPDR Gold Shares exchange-traded fund, or ETF, (GLD) that track the price movements of the so-called “yellow metal.” His firm uses a manager who buys bullions and stores it in a vault, which he says gives his firm’s clients the opportunity to access a product whose price moves more in lockstep with the market price of gold, and is even more cost effective than gold funds or ETFs.

In terms of stocks, Cohen believes investors should consider small-cap shares.

“Historically, coming out of recessionary times, small-caps are among the best performing equity asset classes,” he says. “Granted, many of these companies may have struggled during the dire economic times as investors shun anything other than industry leaders. Now may represent a decent time for cautiously optimistic investors to again look at small-cap companies, particularly when combined with some exposure to gold as a hedge against renewed downside pressures on stocks.”

Cohen recognizes that the newly enacted government programs could prove helpful in jump-starting the U.S. economy – which should enable the recent upward move in stock prices to continue. In particular, he sees some successes in the Fed’s attempts to get corporations and municipalities borrowing again.

“The credit markets definitely are showing signs of life,” said Cohen. “In the first quarter, domestic companies issued over $350 billion in new investment-grade paper and interest rate spreads between [corporate bonds] and Treasuries are coming down. Likewise, according to Lipper, investment-grade [municipal bonds] were up 4% to 5% in the first quarter and investor demand for such offerings seems to be on the rise. In fact, the state of California moved up a recent sale of $4 billion in bonds by a day to accommodate the demand for what turned out to be one of the largest tax-exempt offerings since 2007.”

Mortgage-market distress could also create some investment opportunities for investors who do their homework, Cohen says.

“I am a firm believer that challenges create opportunities, and no products have experienced more significant challenges over the past few years than mortgage-related securities,” said Cohen. “Amid the subprime debacle and related credit crisis, all mortgage products have struggled and even the higher-quality paper is being priced as if it is a toxic asset. We use a fixed-income manager who has been buying up more stable mortgage-backed issues at what he perceives to be tremendous values because of the negativity that has enveloped the entire asset class.”

A market historian to the end, Cohen likes to return to what he knows best when attempting to analyze just where he believes the markets will head next.

“Dating back to 2000 through mid-March, the equity market lost about 3% in value, so history may suggest we are about halfway through what some would call a secular bear market,” Cohen said. “During such times, it is quite common to experience periods when markets really take off. In fact, during the last few weeks in March, equities rose over 20% and some investors have pointed to that move as evidence that the market had bottomed and the turnaround had begun. In reality, since October 2007, we have seen six rallies of various magnitudes.”

Source: After a Tough First Quarter, Investors Have Cause For Cautious Optimism

[Editor's Note: This look at the U.S. economy and stock market is the latest installment in a series of Money Morning quarterly reports that will examine such topics as gold, housing and oil. These reports will now be a regular feature at the end of each quarter.]