Jersey Benefits Advisors Investors Newsletter Winter 2011

MARKET WATCH

By the time you read this newsletter, 2010 will be cast upon the dustbin of history, Auburn will be the national football champion, and President Obama will be dealing with a very different Congress. As I mentioned in the fall newsletter, the consensus was the House would go to the Republicans and the Senate would remain in Democratic hands. This scenario played out exactly as anticipated, and you might think a couple of years of center to right policy could be expected.

Well, if the only bipartisan effort of 2010 completed by the lame duck Congress is any indication of the future, it looks like long term fiscal stability is still the last issue of importance in Washington. In this compromise, according to Thomas Donlan in a Barron’s editorial, “President Obama and soon-to-be House Speaker Boehner agreed to settle their policy differences by giving each other what he most wanted. The President received a temporary extension of long term unemployment benefits and a temporary cut in the Social Security payroll tax; Boehner received extension of all the tax cuts enacted temporarily back in 2001-03 and an assortment of temporary tax credits for business. Economists familiar with American political behavior note that neither side gave up any cherished spending or tax breaks; both sides compromised at the expense of long term fiscal stability.” The University of Maryland’s Peter Morici bluntly stated, “Instead of each side getting half of what it wanted, Washington feasted and everyone got everything they wanted and more”. Welcome to 2011!

Despite a difficult economic environment coined “The New Normal”, the markets enjoyed a very good year. Upon further study I learned the “New Normal”, which I suppose replaced the “New Paradigm”, isn’t such a novel concept the way it was used by Pimco Bond guru, Bill Gross, to describe what he saw as a period of extended slower growth, smaller asset returns and narrower profit margins than in decades past. The “New Paradigm”, for those of you who may have missed it, or forgot about it, was a term coined back in the days of the dotcom mania. The idea was profits were no longer as important as the business concept itself. We all know where that brainstorm led us.

As it turns out, the term “New Normal” may be as old as hard times itself. Consider this quote from Business Week: “In 1939, a decade into the worst economic slump in American history, New York City Mayor Fiorello La Guardia remarked: ‘We must realize this is not a temporary depression, but a New Normal and adjust ourselves accordingly.’ That year, New York’s Central Park was filled with people living in tents and the world’s tallest tower had so many vacancies that it was nicknamed the ‘Empty State Building’. Normals seem permanent. They never are.”

Nothing has been normal about the markets the last three years, and 2010 was no exception. The Dow Jones Industrial Average* ended the year at 11,577.51 which is an 11% gain. The S&P 500* closed at 1,257.64 for a 12.8% increase, while the NASDAQ* finished the year at 2,652.87 for a 16.9% gain. Since the average annual gain for the S&P 500* between 1926 and 2009 was 9.8%, one could say this was better than a normal year for the index, and much better than was anticipated just two years ago.

So, Happy New Year to you and remember, the markets can be gut-wrenching at times, but with a diversified and unemotional approach they can also be very profitable. Thanks for your continued confidence in me.


Gold closed at $1,420.55 per oz. for 2010. That’s a 26.7% increase for the year. The graph above shows the history of gold from 1971 to the present. Caveat emptor????

THE CHASM BETWEEN FEELINGS AND FACTS

 

A recent Bloomberg poll conducted in October 2010 found that 2 out of 3 likely voters in the November midterm election said that taxes had gone up, the economy had shrunk and the billions of dollars lent to banks as part of the Troubled Asset Relief Program (TARP) would never be recovered. The most significant finding about the poll is the dichotomy between belief and reality. The facts are that since 2009, Congress and the Obama Administration have cut taxes by $240 billion and growth has continued uninterrupted in the US and most major economies since the recession ended in June 2009. Furthermore, the Treasury expects a $16 billion profit on the money lent to the banks during the TARP rescue. They must have polled people who don’t read this newsletter!

 

THE POLITICAL AND ECONOMIC OUTLOOK & MORE

 

As I mentioned in the Market Watch segment, there is a new Congress in Washington. With the House and Senate controlled by different parties, gridlock is a possibility, which a cynic might say could cause Congress to do nothing, and that would be a good thing. I have to admit I’ve uttered those exact words, especially when I get frustrated with the direction of government. After the deal on taxes and unemployment it does seem like the cynic’s scenario might be preferable.

However, being the optimist I am, I think this just might be a time when some productive action could be in the wind in regard to entitlement programs, taxes and budget deficits. It also helps to add some perspective to the problems we currently face as a country. To do that, let’s look at another Bloomberg poll conducted in September 2010 which revealed that, “77% of global investors expected the European monetary union would crumble and at least one struggling government would default, all despite a $1 trillion euro zone backstop. Greece and Ireland may have stared into the white light of fiscal death, but they were yanked back to earth by their neighbors, wounded but without default”.

Many people are concerned about the fiscal condition of some of the states in our own union. I had the chance to hear St. Louis Federal Reserve President James Bullard address the financial health of our own states against the backdrop of the conditions in Europe. His response was enlightening as he remarked,” There is no imminent crisis with any US state as in Europe where Greece and Ireland were borrowing 100% of GDP. US state’s borrowing is more like 10% of GDP. In the US it is more about making policy decisions like lower spending, higher taxes or both”.

With spending and deficits at the state and federal levels in the crosshairs of many in Congress, and the Obama Administration at least feigning a move to the center, perhaps there may actually be some headway made toward fiscal sanity. Well, one could hope!

As we enter 2011, it helps to be aware of the problems we face as a nation. There are many people concerned about the unprecedented monetary interventions, and the staggering debt load of the government. The extraordinarily low interest rates we have now will need to be increased, but the economy, while improving, is not growing at a level that can even begin to bring the unemployment rate back down to acceptable levels. While energy and food prices are rising, the impetus for major inflation, wage growth, has no traction. So I think for now, interest rates will stay low and inflation will remain tame. The Fed will have to monitor this closely and act decisively if growth accelerates.

* THE S&P 500, THE DJIA AND THE NASDAQ ARE UNMANAGED INDEXES THAT ARE WIDELY USED AS INDICATORS OF MARKET TRENDS. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE PERFORMANCE OF THESE INDEXES DOES NOT REFLECT FEES AND CHARGES ASSOCIATED WITH INVESTING. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.

DOLLAR COST AVERAGING THROUGH A SYSTEMATIC SAVINGS PLAN IS AN EXCELLENT WAY TO BUILD AN ACCOUNT WITHOUT A SIZEABLE INITIAL INVESTMENT. 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 ALSO BE OPENED, AND DEBITED DIRECTLY FROM YOUR CHECKING OR SAVINGS ACCOUNT. FOR MORE INFORMATION, JUST CALL TO SET UP AN APPOINTMENT. REFERRALS ARE ALWAYS WELCOME.

COMPANY INFORMATION

Investment Advisory Services offered through:

Jersey Benefits Advisors

P.O. Box 1406

Ocean City, N.J. 08226

Phone: 609 827 0194

Fax: 609 861 9257

Email: kaighn@jerseybenefits.com

http://www.jerseybenefits.com/

Securities offered through:

Transamerica Financial Advisors, Inc.

A registered Broker/Dealer

570 Carillon Parkway

St. Petersburg, FL 33758-9053

800-245-8250

Member FINRA & SIPC

Transamerica Financial Advisors, Inc. is

not affiliated with Jersey Benefits Advisors.

Third Party Administration and Insurance Services offered through:

Jersey Benefits Group, Inc

P.O. Box 1406

Ocean City, N.J. 08226

Phone: 609 827 0194

Fax: 609 861 9257

Email: kaighn@jerseybenefits.com

Email: Billcola@yahoo.com

Http://www.jerseybenefits.com/

All opinions expressed in this newsletter are solely those of John Kaighn and Jersey Benefits Advisors.

LD39315-01/11



Jersey Benefits Advisors Newsletter Fall 2008

DOWN BUT NOT OUT! THE FINANCIAL CAPITAL OF THE WORLD HAS BEEN HUMBLED, BUT NOT DESTROYED!

Market Watch

I ended my summer newsletter with the following assessment of where our economy was heading. It was written before talk of the Emergency Economic Stabilization Act of 2008, which became law on October 3, 2008. “With all of the stresses on the US economy, confirmation of a recession could become a reality either in the second half of this year, or early in 2009. The healing process necessary to recover from the mortgage fiasco and oil shock is underway.”

There is no doubt that anger, frustration and fear are feelings that are being experienced by many of us as we’ve witnessed the deflation of the housing bubble and the subsequent credit crisis which culminated in the emergency relief plan mentioned above. It is important to understand that many economists think this period will be labeled a recession, when the dust has settled and the National Bureau of Economic Research (NBER) assesses the situation, some time in the future. Meanwhile, we are faced with the here and now and surviving this period, while planning for the recovery.

It is important to understand how we got here in order to avoid the same mistakes in the future. The initial media reaction was to blame Wall Street for this fiasco, but as events play out, it is being understood the blame can be equally placed on the shoulders of government, as well as many of the citizens of this fair land who used the equity in their homes as a bank, and stretched for outsized gains on their investments.

At the heart of the matter sit the two Government Sponsored Enterprises (GSE's) Fannie Mae and Freddie Mac. By being a GSE these companies were treated like they had the full faith and backing of the Federal Government, even though they didn't. A little history helps to understand the dilemma.

Fannie Mae was created by the government during the Great Depression to buy mortgages, which they guaranteed with the full backing of the government. In 1968, President Johnson structured Fannie Mae as a government sponsored enterprise, without the guarantee. In the 1970's, Freddie Mac was created and the two quasi public entities began buying mortgages and packaging them into securities, which were purchased by banks, investors, governments and others around the world, because of the “implicit guarantee” that if anything went wrong, the US government would back the securities. Fannie and Freddie were also encouraged by the government to increase lending for subprime mortgages in order to advance the government’s agenda for “affordable housing”.

As we all know by now, the two GSE's did fail, and while the reasons are varied, the implicit guarantee is now an explicit guarantee. Furthermore, the actions of Fannie Mae and Freddie Mac made housing more expensive, not more affordable!

The ensuing credit crunch has had a chilling effect on the stock market, which has not been very pretty this year. At the end of the third quarter, the DJIA was 10,850.7, the S&P 500 clocked in at 1,164.74 and the NASDAQ finished at 2,082.3. All of the indices are in bear market territory and down significantly for the year.

There will be some false starts and possibly some more gut-wrenching ups and downs, especially as the election bears down on us. Fortunately, all bear markets end, just as their counterparts do. Usually, when you least expect it!

Economic Outlook

Regardless of your feelings about the government rescue plan and where the fault lies, the reality of the situation is that the government has chosen to clean up a mess it helped create. The implications for the broader economy remain to be seen, but one thing is for sure, the road to recovery will be bumpy and prolonged. While it is generally believed the current crisis is not over, general consensus is that it is beyond halftime, to use a football metaphor, and possibly in the fourth quarter. I doubt very much the recovery will be instantaneous, even with the recent government actions. Look for a period of extreme volatility as we decide on a new President.

When the news is all bad, and the media paints a dire picture of the future, it is difficult to take the steps which could help you to benefit from the current financial landscape. Those of you who are investing in retirement plans or other investment accounts on a monthly basis, are picking up shares at a discount. While your account value may be down, once the market begins to rebound, the value of your account will increase rapidly, reflecting the increased number of shares you own. If you are not regularly contributing and have some available cash, the next several months should be a good time to add to your account, but I would caution against making a large investment at once.

To help you conquer investing phobia, consider this study by Psychologist Paul Slovic of the University of Oregon. In 2001 he had investors estimate the performance of their portfolio over the next 12 months and the decade to come. Only 6.7% of investors expected a zero or negative return in 2001 and only 1.3% thought they’d have no gains over the next 10 years. He asked investors the same question on September 29, 2008 and 36% of investors saw no profits for the current year and 5% predicted their portfolios would go nowhere for the full decade. Obviously, investors view of the next decade is being shaped by events of the last few days. Looking backward at where the market has been is a surefire way to ensure you will miss opportunities going forward. According to Jason Zweig, author of the Intelligent Investor column in the Wall Street Journal, “You need only two things in order to have an edge in today’s market: cash and courage”.

While the current economic situation seems challenging, the actions by the Federal Reserve and governments around the world will prevent the doomsday scenario of global depression. History will be the judge as to the severity of today’s difficulties, but lessons learned during the Great Depression indicate no government action can be catastrophic. I’ve opted to suspend consolidated statements until the year’s end, so call me to discuss quarterly statement concerns.

Protecting Your Assets In a Down Market

For those of you invested in the Transamerica and MetLife Annuities, I want to remind you about the Guaranteed Minimum Income Benefit on your account which protects the assets so your account will continue to grow in a down market. Look for the line item GMIB, Income for Life or Managed Annuity Program to ascertain this value. While the market value reflects the turmoil in the stock market, the beauty of these products is their insured value during times of market upheaval. These products help to protect your assets and are an especially good investment for retirement assets. While nobody likes to see losses in value, it is reassuring to know these products have protection against downside risk and that insurance companies must have adequate capital in reserve.

Investment Advisory Services offered through:
Jersey Benefits Advisors
P.O. Box 1406
Ocean City, N.J. 08226
Phone: 609 827 0194
Fax: 609 861 9257
Email: kaighn@jerseybenefits.com
Jersey Benefits Advisors

Securities offered through:
Transamerica Financial Advisors, Inc.
A registered Broker/Dealer
1150 S. Olive St. Suite T-25
Los Angeles, CA 90015
800-245-8250
Member FINRA & SIPC

Third Party Administration and Insurance Services offered through:
Jersey Benefits Group, Inc
P.O. Box 1406
Ocean City, N.J. 08226
Phone: 609 827 0194
Fax: 609 861 9257
Email: kaighn@jerseybenefits.com
Jersey Benefits Group, Inc.

John H. Kaighn

Jersey Benefits Advisors

The Kaighn Report

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

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How Much Was That Partridge?

As we began the week the Dow Jones Industrial Average was still up 7.03% for the year, while the NASDAQ was holding onto a 9.13% gain and the S&P 500 managed to hang on to a 3.5% year to date gain, but concerns about flaggng growth and rising prices extended last week's losses into the final week of trading before the Christmas Holiday. The Dow Jones Industrial Average fell 172.65 points on Monday and all the major indexes lost at least one percent. A speech Sunday night by former Fed Chairman Alan Greenspan added to the market's ill humor. Greenspan said "stagflation", when inflation accelerates and the economy weakens, is a growing possibility, given last week's data showing spiking consumer prices. With inflation on the rise, the Fed, which has reduced the target federal funds rate three times since the summer, might feel less inclined to lower rates again.

Meanwhile, PNC Wealth Management released its tongue in cheek Christmas Price Index based on the items in the song "The 12 Days of Christmas". According to PNC, the total cost of the items in the song is now $19,507.00, which takes into account the 3.5% increase in the Consumer Price Index so far this year. The $395 cost of 5 gold rings reflects the 21.5% increase in the price of gold over 2006. Even though the Fed primarily looks at core inflation, which excludes food and energy price increases, the overall CPI rate of 3.5% is well above their target level of a 1% to 2% rate of inflation.

The market reacted to the Feds 25 basis points cut in interest rates with a thud last week, 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 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 an article in Monday's Wall Street Journal, most economists they have 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 your investments.

Overall, the comparison of earnings in the coming year to earnings in 2007 could surprise on the upside, because they will be compared to weaker numbers from the preceding year. Whether we can avoid a recession and have another soft landing, similar to the first quarter of 2007 remains to be seen. As a student of history, I like the odds of a market gain for 2008 in the context of three Fed rate reductions, especially when the mainstream media has begun to talk about the possibility of recession. Enjoy the Holidays and let's hope the markets can stabilize and add to the meager gains for the year.

John Kaighn

Jersey Benefits Advisors

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Poised For The Christmas Rally?

Since experiencing the late November 10% market correction, when stocks fell from their October high of 14,164.53 to 12,743.44, investors have been looking for a reason to believe the current bull market was not on its way to extinction. Wednesday's data gave plenty of reasons to believe there is still some upside potential in this market. While the disruptions in the housing and credit markets during the late summer and fall are still very much in the picture, I am sure the Fed has got to feel it has some breathing room, insofar as monetary policy is concerned, going forward.

On Wednesday, the U. S. stock market added 196.23 points for the day after data released in the morning cast a more optimistic light on the U.S. economy, while leaving intact hopes of another interest-rate cut next week. Before the opening bell rang, major stock index futures had extended early gains after ADP reported hiring in the private sector expanded at a faster pace in November, gaining 189,000 jobs after a revised 119,000 jump in October. The latest monthly hike is well above forecasts calling for a rise of 60,000. In another report, the Labor Department said productivity in the nonfarm business sector rose at a 6.3% annual rate in the third quarter, an upward revision from the 4.9% tally a month ago. Also, the government revised unit labor costs down, showing a 2% annual decline compared to a 0.2% drop estimated a month ago, which signals milder inflationary pressure than previously thought. Later in the morning, the Commerce Department said orders for U.S. made factory goods climbed 0.5% in October, its biggest increase in three months. The Institute for Supply Management repoted its nonmanufacturing index declined to 54.1% in November from 55.8% in October, with the drop larger than expected. "The economic news that we got today was quite positive. We saw factory orders go up and we saw the non-manufacturing sector continue to grow," said Peter Cardillo, chief market economist at Avalon Partners.

A great article in the Wall Street Journal recently dicussed some of the lessons that were hopefully learned by investors during this wild year. Dan Fuss, of Loomis, Sayles and Co., stated one of the lessons investors should have learned this year is that "The worst thing you can do is get into frequent asset reallocations. There's a financial cost going from fund A to fund B. The more important cost is that it messes up your thinking about what it is you want to accomplish with these funds". John Bogle of Vanguard Group feels the lesson learned this year is "Don't let your emotions drive your investment program, because you will be thinking of getting in and out. For investors the best rule by and large is to ignore daily moves of the stock market". Jeremy Siegle of the Wharton School of Business opined, "It's very important not to be caught up in the prevaling sentiment, because usually those are not good times to sell when the market is going down. In fact, this is really an illustration of the importance of what we call dollar-cost averaging".

Disciplined, non-emotional investing has been my mantra over the years and is definitely the way to go for investors. Dollar-cost averaging works quite well in volatile markets like we have seen this year, because the chance of buying shares on sale increases when monthly purchases are made in a volatile year. It is fantastic to have such respected business and investment colleagues reinforcing what you've always believed.

John Kaighn

Jersey Benefits Advisors

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Balancing Upside And Downside Risks

"The Committee judges that, after this, the upside risks to inflation roughly balance the downside risks to growth". With that statement, the Federal Reserve summed up the decision to lower the Federal Funds rate by 1/4 point to 4.50% at the October Federal Open Market Committee Meeting. The Fed figures that rising commodity prices, especially oil, pose as great a risk of igniting inflation as the risk of lower growth of the economy created by the credit crunch and struggling housing market.

The continued downward trend of the dollar, a result of lower interest rates, added to the tension the Fed's decision has created as it walked the tightrope of maintaining employment and growth without increasing the likelihood of a new round of inflation. Data from the Bureau of Labor and Statistics indicated the economy was growing at a higher that expected annual rate of 3.9% in the third quarter, but the purchasing manager's survey showed weak manufacturing data for the month of October. Initially, the market took the Feds move with a bullish move on Wednesday climbing 137 points, but as the reality of the severity of the economic situation became evident, the market subsequently sold off 362 points on Thursday.

A report from the Commerce Department indicated consumers scaled back their spending in September as worries mounted about a worsening housing market and further credit market turmoil. A trade group reported that manufacturing in the U.S. grew in October at the weakest pace since March. This combination of factors led investors to pull back sharply from Wednesday's rally, after the Fed said the economy had weathered the summer's credit crisis.

With the market's growing pessimism about the economy, the Labor Department's report on October jobs creation, scheduled to be released Friday morning, will be taking on even more importance than usual. The combination of no more rate reductions, rising oil prices, continued credit concerns and slower economic growth indicates a need for investors to be cautious in their risk assessment going forward. While I don't see definite indications of recession, caution is always prudent during times of market duress.

John Kaighn

Jersey Benefits Advisors

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Housing Market Continues To Struggle

As we begin the fourth quarter of 2007, the housing market continues to cast a troubling shadow over the economic outlook. Even though builders have been giving huge discounts, sales of new homes in August fell to their lowest level in seven years. New home sales dropped 8.3% in August from July, and year over year from August 2006 to August 2007, new home sales dropped a staggering 45% from 11,000 sold in August 2006 to 6,000 sold in August 2007. To see how this is affecting builders, KB Home, a Los Angeles builder, reported a loss of $35.6 million for the quarter ending August 31, 2007 as compared to a $153.2 million net profit a year earlier. Jeffrey Mezger, KB’s president said “We see no signs that the housing market is stabilizing and believe it will be some time before a recovery begins”.

Another troubling sign with the housing market is the declining value of homes, which will be sure to affect consumer spending. Standard & Poor’s Case-Shiller Home Price index, which measures home prices in 20 major cities, showed prices down 3.9% in July from a year ago, which was faster than June’s 3.4% drop. Just as sales of new homes were down in August, sales of existing homes were down 4.3% from July, and the time needed to sell houses on the market has increased to 10 months, which is the highest in 20 years.

Even though employment in the construction, real estate, mortgage and financial services industries is taking a hit due to the housing downturn, overall unemployment has actually shown a drop in claims. Despite an anticipated wave of layoffs expected in the mortgage sector alone, initial claims for unemployment fell 15,000 in the latest report by the Labor Department, the second weekly decline in a row and the lowest level since May. According to David Resler, chief economist at Nomura Securities, “The jobless report helps bolster forecasts that the housing slump may brake growth, but the economy will not degenerate into a full-fledged recession”.

The government also reported in the last week of September that the nation’s gross domestic product expanded by 3.8% in the April to June quarter, and this was a bit less than the estimated 4% economists had expected. With the difficulties the economy faced in August and September, many economists expect the GDP to have slowed to 2% in the third quarter. With growth slowing, hopefully the Fed has bought some time to alleviate the credit crunch with its half a point rate reduction, which may allow for an orderly decline in housing prices and sales, as opposed to a free fall. Even though housing prices are expected to continue to fall by some estimates through 2008, and possibly until 2010, an easing as opposed to a rout is always less troubling.

John Kaighn

Jersey Benefits Advisors

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Summer Close Out Sale

As we prepare for the last two weeks of August and the Labor Day Holiday, traditionally a time of vacation, low volume and low volatility on Wall Street, there are many folks who hope the Fed move on Thursday was the right prescription for the credit markets. By dusting off a little used weapon in the monetary policy arsenal, Mr Bernanke has attempted to encourage banks to loan to the credit worthy, without bailing out those who have been irresponsible in the use of leverage. By lowering the discount rate by half a percentage point to 5.75%, the Fed lowered the rate it charges banks when they borrow from the Federal Reserve. While borrowing from the Fed is viewed by banks as the creditor of last resort, this should help companies such as Countrywide, which has a banking operation and is able to borrow from the Fed. It also encourages banks to continue to make credit available to other businesses, who are not necessarily affected by the subprime mortgage mess, but have had a difficult time lately selling commercial paper and other short term financing facilities because banks have been reluctant to make any loans, due to the fallout from the mortgage mess.

The markets reacted positively to the Fed move on Friday, and after reading numerous articles over the weekend, my conclusion is that this was a very good move by the Fed. While it may not stop a further slide in the markets in the short term, it doesn't reinflate the mortgage bubble, because the Federal Funds rate, the rate banks charge each other, hasn't changed. While there is a minority calling for a lowering of the Federal Funds rate, and you can be sure these are the people who are being toasted by their use of leverage, most responsible voices seem to be indicating the system can handle the losses from the subprime mortgage sector and lowering the Federal Funds rate could lead to further speculative excess.

The Dow crossed the 10% correction threshold on Thursday, but managed to close in somewhat better shape and rallied on Friday. While the S&P 500 was down as much as 12% from its July peak intraday on Thursday, it also managed to recover late in the day and rose back to 1,445 by the close on Friday. Where the markets go in the next two weeks is really only an issue, if you have a need for short term cash. If you are invested for the long haul, you ride out the volatility and continue to add to your holdings, for when the markets are down, shrewd investors view it as a sale!

John Kaighn

Jersey Benefits Advisors

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Welcome to the "Credit Crunch"

In just a few short but grueling weeks, we have gone from an environment where liquidity was king to a "credit crunch", the antithesis of liquidity. Volatility has replaced predictability in the markets and the European Central Bank, their counterparts in other parts of the world, as well as the Fed pumped billions of dollars into money market funds last week to calm nervous markets and provide short term funds. Futures markets are even betting on the Fed to lower interest rates in the near future, to increase liquidity and bail out some of the bad bets on derivative investments, which have been magnified by the use of over the top leverage. Let' hope the Fed doesn't cave.

With interest rates at 5.25%, oil and gasoline prices in decline and the rest of the economy still growing, the interests of the overall economy would be best served by allowing for the liquidation of some of these bad investments and the subsequest pain being felt by the very individuals and institutions who initiated this newest bubble. There is credit available for other sectors of the economy, besides the private equity and subprime mortgage crowds, and while confidence may be shaken somewhat, by an end to easy credit, it is important for those who make bad bets with leverage and create asset bubbles to learn the Fed will not bail them out. Lowering interest rates at this juncture would only reinforce the over leveraged hedge funds and private equity managers to continue their risky ventures and to overpay for assets.

Look for continued volatility in the markets this week as investors try to ascertain whether the subprime debacle has been contained. It is entirely possible the Dow could slip below 13,000 as the market searches for a bottom. Thankfuly, this is also vacation time on Wall Street, so there should be a slowdown in volume after this week as we head into the last two weeks of August and the Labor Day Holiday. This is traditionally the time of the year with the slimmest volume in the markets and many hope that by September, the extent of this latest crisis will be better understood. My hope is that the Fed stays firm with interest rates and uses monetary policy prudently over the next few weeks.

John Kaighn

Jersey Benefits Advisors

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Keeping an Eye on Long Term Trends

As anticipated on Tuesday, the Federal Reserve left interest rates alone, didn't change their outlook on inflation being their primary concern and predicted moderate economic growth going forward. After the gains of Monday and Tuesday this week the Dow is halfway to 14,000 again. A little volatility now and then never hurts, and it keeps the speculators at bay.

Corporate earnings have been mixed, but overall positive, which continues to draw money into stocks. It is hard to sit in cash when the markets provide so much drama and a usually higher return to boot. For the long term investor, the daily business news reports take on an air of entertainment, as they put so much emphasis information with little or no long term significance. Sifting through this fodder for useful long term trends is my major goal.

One of those long term trends, which I have been warning about since early 2006 is housing and subsequently the credit markets. As the credit markets tighten, due to the mess created by lax lending standards during the specuative housing boom, there is a great deal of pain being felt. Containing the damage is critical, which is why the Fed is holding rates steady and not lowering them. Lower rates now would only create more liquidity, which in turn would provide reinforcement for exactly the kind of behaviors the Fed is trying to curb.

John Kaighn

Jersey Benefits Advisors

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Two Steps Back

After a lackluster four days of up and down trading, the subprime woes and a weak jobs report hammered the market on Friday. With hedge funds, builders and mortgage companies melting down, the concern is the housing mess will spill over into other areas of the economy. Hence, the uptick of the unemployment rate to 4.6% gave traders one more reason to unwind their positions.

On Tuesday, the Federal Reserve meets and investors will be looking for any references to the problems in the credit markets or a change in the Fed's position on inflation. There is no indication there will be any change in the Fed's target interest rate of 5.25%, which has held steady for over a year now. Lehman Brothers anticipates the Fed's outlook on growth and inflation will remain unchanged and only a minor acknowledgement of market developments will be mentioned.

The biggest concern I have is how over leveraged the financial system is. Treasury Secretary Paulson has stated the subprime credit fiasco is contained, but others aren't so sure. Alan Abelson, of Barrons, cites concerns by Jeremy Grantham, who runs GMO, an insitutional money manager. Grantham feels we are "watching a very slow train wreck", and that in five years, because of over leverage, at least one major bank will have failed, half of the hedge funds and a substantial percentage of the private-equity companies "will have ceased to exist". One of the great equalizers of our markets is the fact that eventually unsound investments unravel and leave unwise investors holding a worthless bag. The question is how far down do these unsound investments drag the rest of us. Containment becomes a very important issue.

John Kaighn

Jersey Benefits Advisors

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Internet Home Business Ideas and Opportunities

Happy Memorial Day

The summer months, which usually are considered the doldrums by those in the investment community, could provide some interesting outcomes as we head into the Memorial Day weekend and what many see as the onset of the summer season. This is also the start of the summer driving season, and gasoline is already hovering around $3.00 a gallon. As hurricane season also begins to heat up, I hope there are no direct hits on the oil infrastructure, or the possiblity of $4.00 a gallon gasoline I've read about could become a reality. Meanwhile, the Dow Jones Industrial Average continues to set record after record, and now the S&P 500 is is less than 5 points away from its all time record of 1,527.46 set in 2000. If the Federal Reserve holds interest rates steady at the FOMC meeting in June, they will have held rates steady for a year, something the Fed does not do often. The Fed has held its target for short-term rates at 5.25% since June 2006, after raising it steadily for two years to tame inflation. Banks use the rate as a benchmark for pricing consumer and business loans. These issues could be setting the stage for a very interesting second half of 2007.

For well over a year now, I've been writing about the dual concerns of a slowing economy and inflation. Fed policy has been concerned with remaining hawkish on inflation, while some economists, investors and journalists expected rate cuts as early as September 2006. The midcycle slowdown economists predicted seems to be exactly what has happened, with the bottom being symbolized by April's paltry retail sales figures. While many thought the housing slump would drag the economy into a recession, it seems the builders and subprime borrowers are the ones bearing the brunt of the pain. Most homeowners remain solvent and able to meet mortgage expenses. As long as the employment numbers continue to hold steady, consumers should be able to continue to meet obligations and make discretionary purchases.

Where the economy goes from here no one can predict with certainty, but there are reasonable hypotheses one can make based on the data. This economic cycle is in the mature phase of the current expansion and the mid cycle slowdown was like a breather, before growth picks up again. Expansions don't last forever, so at some point in the future we will have a recession again. With that said, it looks as if the second half of 2007 will be a time when growth reignites and inflation will continue to be the number one concern of the Fed. With the productivity of workers declining, and the pool of skilled workers drained, labor will begin to demand higher wages. Usually, when the economy slows down unemployment ticks upward, but that hasn't happened during the first two quarters this year. Some economists think this is because the slowdown in housing hasn't worked its way down to the employment figures. Others think there is a possibility the economy is actually growing faster than the GDP numbers indicate. As we head into the Memorial Day weekend, one thing is certain, gas is going to cost you about $3.00 a gallon. As far as interest rates are concerned, the jury is still out. Will the Fed raise, cut or hold? Will the S&P 500 EVER break 1,527.46? Time will tell. Enjoy the holiday!

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