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Mid-Year 2008

I must apologize for last week’s absence of a Financial Tip. I spent the first part of the week at Boy Scout camp with my youngest and then the Fourth of July just kind of crept up on me. Regardless, given that we’re at the half-way point of a very eventful year, I think it wise to take stock of where we are. So, here’s a take on the subject…

Financial Markets

Financial markets have been rough. Each of the following stock market indices are down and, frankly, they are not very “up” over the past ten-years, eking out a return less than the, roughly, 2.9% rate of inflation over those ten years. We’ve been hurt by market risk, the risk inherent in marketable securities, which have driven prices down.

Returns through 7/8/2008

2nd Quarter

Year to Date

1-Year

3-Year

10-Year

Dow Jones Industrials

-7.4%

-14.2%

-15.7%

2.9%

2.4%

NASDAQ Composite

0.6%

-13.5%

-13.1%

2.8%

1.9%

Standard & Poor’s 500

-3.2%

-13.3%

-15.7%

1.7%

1.2%

Source: Wall Street Journal, July 9, 2008.

Inflation

Oil prices rose 37.8% in the second quarter of 2008 and nearly 46% in the first half of the year. Gasoline prices hit a record high of $4.086 on June 30. Gold prices have risen about 11% for this year, silver is up more than 17%, copper is up 27%, while platinum is up more than 35%. These increases are hitting the manufacturing sector and depressing their earnings, further pressuring stock prices.

For the twelve months ending May 2008, inflation stood at 4.2% (Labor Department). That is outside of the Federal Reserve’s comfort zone of 1 to 2%. Speaking of the Federal Reserve, they are in a predicament for, under normal circumstances, raising interest rates would help squash inflation and increase the value of the dollar. Unfortunately, economists increasingly concur that we’re in a recession, so greater interest rates could lead to even more economic malaise.

Credit Markets

The subprime problems appear to be spreading. Credit problems are moving into home equity lines of credit and other forms of credit. With home prices falling, homeowners have less equity and that makes prudent lenders increasingly more conservative with respect to lending. It is interesting that the Federal Reserve has cut the rate at which member banks borrow from 4.25% (end of 2007) to 2.0% (end of April 2008). In response, the average rate on a 30-year fixed rate loan only changed from 6.2% to 6.0% and has recently risen to 6.4%! This reluctance to lower rates by financial institution is closely tied to their inflationary expectations, as well as current credit conditions (i.e., consumer indebtedness).

Housing Markets

According to the National Association of Realtors, the median sale price of housing has decreased across the U.S., with the exception of the North East. Bloomberg reports that April saw price decreases in 23 of 25 metropolitan markets. Prices in Sacramento, CA decreased 31.7% between April 2007 to April 2008! Charlotte, NC prices fell the least with a decline of 0.1%. The economy needs for housing prices to stabilize but potential homebuyers are sitting and watching. When prices level off, they will enter the market.

Unemployment

The U.S. economy has lost jobs but our unemployment rate, while at a four-year high, is only 5.5% at the end of June (Labor Department). As such, our economy is not damaged beyond repair but it is, frankly, not what we’d like it to be as many of those working are working at jobs that pay less than what they were earning at their prior job. Also, one should be clear that not all industries are suffering, as there are winners in the commodity and energy-related sectors. The devalued dollar, perhaps the biggest reason for the increases in the price of oil, is helping the export sector by making American goods less expensive to purchase.

International Winners and Losers

By broadening our horizon, we find that there are winners and losers throughout the world’s stock markets. Here is a partial list of year-to-date performance ranked by U.S. dollar returns. During the same time period, the Standard & Poor’s 500 index of large U.S. industrial firms returned a -13.3%.

Winners

YTD Return

Losers

YTD Return

Venezuela

3.8%

China

-43.6%

Canada

-0.2%

India

-34.2%

Mexico

-3.3%

Belgium

-27.1%

Brazil

-6.8%

Italy

-26.6%

Russia

-11.5%

Sweden

-23.5%

Source: Wall Street Journal, July 9, 2008.

For the Year-to-Date, ending July 8, 2008, the Dow Jones World Index is down 14.0%. The decline is somewhat worse than the decline over that same period in the S&P 500. While we whole-heartedly believe in diversification in our investments, there are times when stock markets around the world move together. Having said that, there is some solace in the fact that the U.S. market, while hurting, has not been damaged as bad as other markets.

Bottom Line

Yes, good financial news is hard to find and I’ve no inside scoop on how to recover the losses you may have experienced in your portfolio. Having said that and reflecting on my time at Boy Scout camp we must Be Prepared for whatever the future has in store. This requires us to stay diversified and, particularly if your goals are in the distant future, keep a long-run perspective. On the other hand, if today’s markets have turned your world upside down, take a moment to recognize that others are in the same boat. Moreover, try your best to not make any rash decisions that could further imperil your future. I strongly believe that things will eventually turn around. I have to. To think otherwise is to admit defeat and signals that I accept the demise of our society. I will not think that. Once housing and commodity prices begin to stabilize, we just might see a powerful rally in markets and being a participant in that recover is key to each of our Financial Success.

Post Script: Several of you asked about the condition of “Patti”, the subject of our piece entitled Durable Power of What. While the name is fictitious, the person is real and, ironically, the piece you received was sent on her 22nd birthday. She is responding well to experimental treatments but has not been able to return to university.