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A Few Bright Spots

October 8, 2012 — Leave a comment


Weekly Update October 8, 2012

 

 

 

Markets started the week off slowly, but quickly picked up steam after several upbeat economic reports were released. Despite the headwinds blowing across global economies, a handful of important domestic indicators showed that the economy improved in September. All three major indices responded well to this news, posting their first positive week in three weeks, and the Dow finished at its highest level since December 2007.[i]

 

 

 

The biggest news last week was that Friday’s jobs report showed that the unemployment rate slid to 7.8% – dropping to a near four-year low – and the economy gained 114,000 new jobs in September. While these numbers beat economists’ expectations, the not-so-great news is that many of the jobs added were only part time. While it’s too early to see the full effect of the Fed’s QE3 program, the monthly jobs report is one of the best indicators of the economy’s current state of health. Since the whole point of QE3 is to create more jobs and soothe jittery markets, economists and analysts will likely key in on this report to gauge the effectiveness of the Fed’s plan.[ii]

 

 

 

In the FOMC (Federal Open Market Committee) meeting minutes released last week, we were able to gain some insight into the Fed’s decision to use mortgage bonds (instead of the usual Treasury securities) to bolster the economy. According to the official release, Fed officials determined that boosting the housing market was a good way to lift the broader economy.[iii] According to remarks by Chicago Fed President, the Fed will continue its QE3 actions until unemployment falls below seven percent.[iv]

 

 

 

Moving ahead, we should not be surprised to see some market volatility as earnings season heats up. Of the 103 S&P 500 companies that have provided earnings guidance, 78% of them (80) have issued a third-quarter forecast that falls below the Wall Street consensus estimate. But that doesn’t mean you should buy into the doom and gloom forecasts you may be hearing. While past performance is no guarantee of future results, even during the peak of the 2007-2008 financial crisis, more than half of S&P 500 companies topped Wall Street estimates in the third and fourth quarters of 2008.[v] As always, we’ll be keeping an eye on things; and we’ll be keeping you informed. We hope you have a great week!

 

 

 

ECONOMIC CALENDAR:

 

Monday: U.S. bond markets closed for Columbus Day Holiday

 

Wednesday: Beige Book, Treasury Budget

 

Thursday: International Trade, Jobless Claims, EIA Petroleum Status Report

 

Friday: Producer Price Index, Consumer Sentiment

 

www.reuters.com/article/2012/09/14/us-usa-economy-prices-idUSBRE88B1JM20120914

 

3Q 2012 Quarterly Edition
October 1, 2012

Wall Street closed its best third quarter since 2010 after a wave of central bank actions across the globe (and expectations of future action) drove up equities in an unexpected summer rally. However, signs of weakness in the economy pushed markets down in the final week of September and may lead to further bearish sentiment. For the quarter, the S&P rose 5.76%, the Dow increased 4.32% and the Nasdaq rose 6.17%.[i] Lets take a quick look back.

July: July was a volatile month for stocks. Markets were kicked around by domestic indicators and news surrounding the debt crisis in Europe. During the final weeks of July we saw the release of
corporate earnings reports for many major companies. Across the board, most companies showed weak revenue, with less than half exceeding revenue expectations. Even so, a number of companies were still able to beat earnings expectations, meaning they are getting better at doing more with less.[ii]

 

August: August was the month of the summer sugar high rally as investors drove up stock prices on hopes that the Fed would undertake further quantitative easing. Retail sales in August beat expectations
due to a strong back-to-school season, which could forecast robust holiday sales. These two shopping seasons are the most important for retailers, so a strong performance could lead to upbeat corporate earnings reports next quarter.[iii]

 

September: Several market-moving events took place last month; markets were dominated by expectations of major Federal Reserve stimulus action and hope that the European Central Bank would unveil a
new plan. Despite the Fed’s historical reluctance to become involved in the election cycle, under the pressure of a disappointing August jobs report, the Fed finally launched the long-awaited additional quantitative easing. Under QE3, the Fed has made an open-ended commitment to buy mortgage-backed
securities to the tune of $40 billion per month. The move is designed to lower long-term interest rates and spur more lending to businesses and consumers.[iv] In a similar move, the ECB launched a bold bond-buying program designed to reassure European investors and lower interest rates on Spanish and Italian bonds.[v]

What’s Next: The first week of October will provide plenty of market-moving data, with the release of third-quarter reports on GDP, manufacturing, consumer sentiment, and more. We will also see the FOMC minutes from last week’s Fed meeting, which will provide more clarity into possible Fed moves this year. Earnings reports for Q3 will start trickling in during coming weeks, and although predictions indicate revenues and profits may be down across the board, we could get some surprises.

 

As we look ahead to the final quarter of the year, markets could decline from their summer peak or rise to new highs. The market rallies of the summer indicate that investors are poised to respond to positive news, and should the economy show further signs of recovery, we may see more bullish market behavior. With the election cycle nearing its conclusion, markets may also react to political uncertainty surrounding the fiscal cliff and other economic issues.[vi]

 

As an investor, it is wise to assess your own risk tolerance from time to time and make sure you are allocated suitably for your personal investment objectives. If you have questions about how your own portfolio should be positioned for the rest of 2012, please don’t hesitate to contact us, we’d be very happy to review it with you and answer any questions you might have.

Is there a better option than home ownership? Granted owning your home is aligned with the American dream. However, through the recent economy and turmoil in the real estate markets the question has become more common to ask should I Rent or Buy my home? Our guest post takes a look at that very question in Randy Brunson’s post Buying vs. Renting Revisited.

About Our Guest

This week we have a Guest Post from Atlanta based Financial Planner,Randy Brunson. Randy studied at The University of Tennessee – Chattanooga and has spent the majority of his thirty year career advising his clients on building their personal wealth. In addition to Founding Centurion Advisory Group Randy is a husband to Teresa and they have two grown children and two grandchildren.

In case you haven’t purchased a home recently, here’s some (very funny) advice on how to work with real estate agents :http://www.youtube.com/watch?v=DwZPhmFwcaI&feature=related.

 

 

For people of a certain age, who remember taking out a home mortgage at 15%, 16% or even near the top at 18%, the astonishingly low rates that banks are charging today are a little hard to believe. This chart, taken
from statistics collected by the Federal Home Loan Mortgage Corporation for 15-year and 30-year fixed-rate mortgages, tells the story: rates have been historically low for years, and they have been trending lower ever since the bottom fell out of the real estate market.

This has created a strange but not unusual market situation: people who remember the housing market collapse are nervous about buying right at the time when they can buy more house for less money than ever before in their lifetime, and finance at rates we may never see again. Our instincts tell us to buy when the markets are booming and prices are high, and to stay on the sidelines when the markets are offering us bargains.

The economic case for purchasing a home vs. renting has always been a bit sketchy. The real estate site Trulia has calculated that the breakeven between the two comes when you can buy for 15 times your yearly
rental costs. By that formula, if you’re paying $20,000 a year in rent, you might think twice about purchasing a comparable home that costs more than $300,000. But that formula has some embedded assumptions about mortgage rates. If you were to buy that $300,000 house and finance it at 18.45%–the average
national mortgage rate back in October, 1981–then your $4,631 monthly payments would amount to $55,572 a year–more than two and a half times the rental rate you’re paying now. This might not be the ideal tradeoff. But at 3.55%–the average national rate in July–the payments are $1,355 a month, or $16,260. At
those rates, even if you factor in maintenance and property taxes, buying might actually cost less per month than renting.

Trulia identifies some markets where prices are historically high and historically low. The average two-bedroom condominium or townhouse in the New York City area currently costs about 32 times as much to buy as to rent. In Seattle, you can expect to buy at about 24 times the rental cost; San Francisco and Portland, OR now cost 22 times as much. Meanwhile, Miami homes are going for about eight times annual rents, while Phoenix (10 times) and Las Vegas (11) seem to be relative bargains.

In general, you should avoid committing too much of your cash flow to the place you live; annual housing costs should be less than a third of your gross annual income. And you probably shouldn’t count on your
home appreciating in value immediately. A recent report by Fitch Investors Services says that in many markets, housing prices won’t have completely bottomed out until late next year. This is not a market for flipping homes. But with the combination of low rates and distressed prices, it may be the best time to buy that many of us have seen in a long, long time.

http://online.wsj.com/article/SB10001424052748703561604575282910161870380.html

Content courtesy of Bob Veres and Randy Brunson