Tuesday, January 22, 2008

Fed Cuts Interest Rate 75 Basis Points

The Federal Reserve, after reviewing the significant global stock market declines on Monday and again on Tuesday, which were at least partially caused by increased fears of a US recession, lowered the federal funds rate by 75 basis points, or three-quarters of a percentage point this morning and indicated further rate cuts were likely. This surprise reduction in the federal funds rate from 4.25% down to 3.5% percent is the most significant one-day rate move by the central bank since it cut the discount rate by a full percentage point in December 1991, a period when the country was struggling to get out of a recession.

In addition to cutting the federal funds rate, the Fed said it was reducing the discount rate, the interest it charges to make direct loans to banks, by a similar three-quarters of a percentage point, pushing this rate down to 4%. Commercial banks responded to the Fed's action on the funds rate by announcing similar cuts of three-quarters of a percent on its prime lending rate, the benchmark for millions of business and consumer loans. The action will mean the prime lending rate will drop from 7.25% down to 6.50%.

The Fed's interest rate moves came after significant declines in Asian and European markets on Monday, while the US markets were closed in observance of the Martin Luther King Holiday, and again overnight and into this morning as global markets continued their sell off. By midday, the U.K.'s FTSE 100 was down 0.3 percent at 5,560.90, Germany's DAX was down 1.7 percent at 6,671.82, while France's CAC 40 dropped 1.3 percent to 4,681.07.

Japan's Nikkei 225 index tumbled 5.7 percent, its largest percentage drop in nearly 10 years, to 12,573.05, a day after falling 3.9 percent. Australia's benchmark index sank 7.1 percent, its steepest one-day slide in nearly 20 years. Hong Kong's Hang Seng index, which slumped 5.5 percent Monday, finished down 8.7 percent on Tuesday. In China, the Shanghai Composite index lost 7.2 percent to 4,559.75, its lowest close since August. Indian Finance Minister P. Chidambaram urged investors to remain calm after trading in Mumbai was halted for an hour when the stock market there fell 10 percent within minutes of opening. The Sensex rebounded some to close down 5 percent after plunging 7.4 percent Monday.

Early market reaction to the Fed's rate reduction was not positive, as the DJIA opened off 450 points. However, as the morning wore on, the losses subsided to a more palatable 150 points off of Friday's close. Whether this will be a complete capitulation and subsequent end of the bull market remains to be seen. Closing values of 1,252.12 in the S&P 500 and 11,331.62 in the DJIA would indicate a 20% decline for those two indices from their highs in October 2007. Even if a recession is avoided, I think global markets are making a huge statement regarding the theory of decoupling, that is, the belief global markets and economies could continue to thrive during a downturn in the US.

The positive news for the day is the European markets seemed to like the Federal Reserve's interest rate decision, because even though they were down at midday, they managed to end on the plus side, for the most part. European policymakers offered no hint on Tuesday they would rush to join the United States with a stimulus plan to inoculate their economies from the ravages of a global stock market rout. The economy is sound and fear and panic should not drive decision making, European Central Bank officials said after the U.S. Federal Reserve's surprise move to slash interest rates.

Jean-Claude Juncker, the senior finance minister for the euro zone economies, said he was keeping a close eye on developments but right now saw no danger of U.S. driven turmoil spilling over to cause a global recession. "When financial markets act irrationally, and are driven by herd behaviour, when stock markets demonstrate short-termism, there is no reason for finance ministers to do the same," Juncker told reporters on arriving for Tuesday's talks. Someone should show the above quote to the alarmist politicians in Congress and the White House before they overstimulate the economy, increase food stamp subsidies and who knows what else. Washington's overreaction and the election year grandstanding could further damage the economy or inflate a bubble in another sector by easing credit too much. Sometimes, less is better, especially when it comes to political demagoguery and bogus spending programs appealing to special interest groups.

John Kaighn

Jersey Benefits Advisors

Plug In Profit

John Kaighn's Web Business Review

John Kaighn's Guidance Website

Saturday, January 12, 2008

Baby It's Cold Outside

It didn't take much time for the market to hit official correction territory from its October 2007 high. After a dismal drop at the end of 2007 and two weeks of trading in the new year, the S&P 500 and the Dow Jones Industrial Average have managed to retreat to that 10% milestone. The January trading barometer, which states that the first 5 days of trading in January set the tone for the month is indicating a chilly month ahead. While the indicator, popularized in 1972 by Yale Hirsch of the Stock Trader's Almanac is quite accurate (91%) when the first five days are positive, the accuracy is only 45% when the first five days are negative. I guess it is really way to early to try to figure out what the year ahead may be bringing, although most of those participants in the Barron's Roundtable seem to think the market won't even begin to come back to life until the second half of the year.

The small nuggets of upbeat earnings news were pretty much drowned out by a continued litany of economic and financial problems. The Dow Jones Industrial Average fell 246 points, or 1.9%, to 12,606 on Friday, losing 1.5% for the week. Since the start of 2008, the Dow has now lost 658.52 points, or 5%. The S&P 500 index was off 1.4% Friday and fell 0.7% for the week. The Nasdaq Composite dropped 2% Friday for a weekly loss of 2.6%.

Fear of bankruptcy at Countrywide Financial led to a 238-point plunge in the Dow on Tuesday, followed by another big drop Friday, even as Bank of America said it would buy the troubled mortgage lender for $4 billion. A year ago, Countrywide's market value was $24 billion. Seems like Bank of America may have gotten a pretty good deal on this transaction, which will be an all stock deal.

Meanwhile, results at major financial firms are expected to continue to reflect the impact of bad bets in subprime mortgages. Citigroup is expected to report earnings on Tuesday, along with US Bancorp and State Street Corp. J.P. Morgan Chase reports on Wednesday, along with Wells Fargo Co. and Northern Trust. Washington Mutual, Merrill Lynch, Bank of New York, and PNC Financial report on Thursday.

Intel's earnings on Tuesday along with IBM's results on Thursday could also further test recent market hopes that the technology sector might continue to benefit from global growth even as the U.S. slows down. Yet, those hopes have waned in the market, with the tech-heavy Nasdaq Composite posting some of the worst losses of major indexes, losing 8% since the start of the year. Investors will also monitor the results and forecasts of industrials giant General Electric Co., which reports Friday, for clues on global growth.

Some key data will also be closely monitored next week, with investors on high alert for signs that the economy might slide into recession. Tuesday will bring reports on December producer prices, retail sales and a key business survey in the New York region. Wednesday will see the release of the December consumer price index, industrial production data, a housing market index, along with the Federal Reserve's Beige Book of economic conditions.

On Thursday, December housing starts, weekly jobless claims and the Philadelphia Fed survey will be released. Friday will bring a key consumer sentiment survey along with leading economic indicators. With oil sitting near $100 a barrel, gold topping $900 an ounce on Friday, and food prices surging, investors remain worried that inflation pressures might prevent the Fed from cutting interest rates as much as hoped. However, "the U.S. economy seems to be facing ever-greater risks of entering a recession, in the light of the latest statistics on unemployment, activity in the manufacturing sector and household confidence," said Philippe D'Arvisenet, an economist at BNP Paribas, in a note. "Under these conditions, the Fed should give priority to avoiding a recession, pushing its concerns about inflationary risks onto the backburner," he said.

I'm sure all eyes will be on the Fed at the end of the month when the Federal Open Market Committee meets. Investors are anticipating a 1/2 point cut in the Federal Funds Rate at that meeting. Unfortunately, it really doesn't seem like monetary policy will be enough to breathe life into the stock market in the short term. There are a lot of excesses which have to be wrung out of the system, and it could mean some short term pain.

John Kaighn

Jersey Benefits Advisors

Plug In Profit

John Kaighn's Web Business Review

John Kaighn's Guidance Website

Sunday, January 6, 2008

Jersey Benefits Advisors Newsletter Winter 2008

Market Watch

After a year of increased volatility and some major financial upheavals, the stock market still managed to finish in positive territory, despite some setbacks along the way. Overall, it was a year that saw many actively managed funds surpass the indices, index related mutual funds and ETF’s.

The Dow Jones Industrial Average ended 2007 with a gain of 6.4% at 13,264.82, while the S&P 500 only managed a gain of 3.4% to close at 1,468.36. The NASDAQ Composite was up 9.8% for the year, closing at 2,652.28 while the NASDAQ 100, an index of primarily technology stocks, managed to turn in the best performance of the year with an 18.7% gain. The Dow Jones Utility Average also had a stellar performance adding 16.6% for the year, while the Russell 2000, which had been on fire recently, had a –2.7% return for 2007.

The market reacted to the Fed’s latest 25 basis points cut in interest rates with a thud in December, mainly because traders wanted a 1/2 point cut. It seems like the traders might have missed the bigger point, because historically, the third in a series of rate cuts by the Fed is a charm for the market. In the year after three successive rate reductions by the Fed, the DJIA has gained an average of 18%. This has happened 14 times since 1921, according to Ned Davis Research. Stocks have risen with striking consistency after three rate cuts, except in 1930, at the onset of the Great Depression, when the Dow fell nearly 40% that year. Let’s hope history is on our side in 2008.

There has recently been a great deal of talk about the possibility of a recession, characterized by two or more successive quarters of negative GDP growth. According to a recent article in the Wall Street Journal, most economists polled put the risk of recession at around 38%, while John Lonski, chief economist at Moody's says, "The odds of a recession right now are just under 50-50." Gary Pollack a Managing Director at Deutsche Bank Private Wealth Management says," The economy will skip a recession because the decline in housing will be offset by increases in exports and government spending." As you can see from the various opinions it is almost impossible to know when or if the economy will slip into recession. Recessions are generally confirmed after the fact, so the best thing investors can do is be aware of the possibility of recession and understand the implications for their investments. Markets usually decline during recessions and assets can be bought at lower prices. If you don't NEED to sell anything during a market downturn, think about adding to and diversifying your investments.

The new year should see further volatility in the markets as investors reassess the risks they are willing to take with their investments. You can be sure there will be fewer subprime mortgages underwritten, and a paltry market for collateralized mortgage obligations. Real estate will probably continue to decline through 2008, as builders cut back on new projects. The number of housing starts many economists feel are needed to lessen the glut is about 500,000 per year, down from 2.6 million at the peak of the housing boom.

This should be an interesting election year as politicians pander to the plight of the plethora of homeowners facing foreclosure in 2008.

Mutual Fund Performance For 2007 VS 2006 And 5 Year Average

The list of funds below is a representative sample of client’s holdings recommended over the years. Many of you will recognize core holdings and sector funds from your account. Notice how returns fluctuate year to year, but the 5 year average remains very strong.

Is The Time Right For a 529 Plan?

Are you a parent or grandparent with a newborn or young school-aged child in the family? Saving money for college expenses is a goal I hear many young parents express, and one of the best ways to build tax-advantaged savings for college is the 529 plan. A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs.

The 529 plan, legally known as a “qualified tuition plan,” is sponsored by states, state agencies, or educational institutions and is authorized by Section 529 of the Internal Revenue Code. Changes in the tax code were made in 2006 making permanent the provision that earnings in a 529 plan are tax free upon withdrawal when used for education expenses. This has resulted in eliminating any change in status for earnings for the 529 plan and made it the premier savings vehicle for college savers.

There are two types of 529 plans: pre-paid tuition plans and college savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a pre-paid tuition plan. There are differences between pre-paid tuition plans and college savings plans, and each individual family needs to determine which plan may be right for their needs. Pre-paid tuition plans generally allow college savers to purchase units or credits at participating colleges and universities for future tuition and, in some cases, room and board. Most prepaid tuition plans are sponsored by state governments and have residency requirements. Many state governments guarantee investments in pre-paid tuition plans that they sponsor.

College savings plans generally permit a college saver (also called the “account holder”) to establish an account for a student (the “beneficiary”) for the purpose of paying the beneficiary’s eligible college expenses. An account holder may typically choose among several investment options for his or her contributions, which the college savings plan invests on behalf of the account holder. Investment options often include stock mutual funds, bond mutual funds, and money market funds, as well as, age-based portfolios that automatically shift toward more conservative investments as the beneficiary gets closer to college age. Withdrawals from college savings plans can generally be used at any college or university. Investments in college savings plans that invest in mutual funds are not guaranteed by state governments and are not federally insured.

DOLLAR COST AVERAGING through a systematic savings plan is an excellent way to build up an account without a sizeable minimum investment. This is the way many company retirement plans function. Saving a portion of our pay each month is very important. Company sponsored pension plans are one method to save and should be used for retirement. Other systematic investment accounts, SUCH AS ROTH IRA’S, TRADITIONAL IRA’S, COVERDELL ACCOUNTS, 529 PLANS, BROKERAGE ACCOUNTS AND ANNUITIES can be opened, some for as little as $50 per month, and debited directly from your checking or savings account. For more information, just call to set up an appointment. REFERRALS ARE ALWAYS WELCOME.

John Kaighn

Jersey Benefits Advisors

Plug In Profit

John Kaighn's Web Business Review

John Kaighn's Guidance Website