Labor Day hangover and Your Weekly Update

Here’s hoping your holiday weekend was a magnificent one!

In addition to golf, motorcycle rides, bicycle rides, and a weekend at the Broadmoor, your authors took time to do something really fun: read the minutes of the most recent Federal Reserve meeting as well as the Annual Trustee Report on Social Security.

We think you’ll enjoy our take on both in this week’s Update.

Oh yes, and by the way, the markets staged yet another strong performance as the S&P 500 crossed 2000 with the Dow firmly over 17,000.

Wow!

Best always,
Lee and Jeremy


This Week’s Quote:

“To every American out there on Social Security, to every American supporting that system today, and to everyone counting on it when they retire, we made a promise to you, and we are going to keep it.”
― George H.W. Bush, January 31, 1990


JL Davis Thoughts This Week:

Living in a free country that respects the rights of workers is a magnificent thing. This Labor Day, amidst the motorcycle rides, golf outings, boating, and (for some) a couple of days of the Broadmoor, we paused to acknowledge the wonderful contribution that workers have made…workers in our family and in millions of other American families who have toiled mightily.

Also, like we do every year around this time, we read the Annual Social Security Trustee Report. For good measure, we threw in the most recent meeting minutes of the Federal Reserve Open Market Committee (they’re in Jackson Hole and meeting again in 2 weeks). Now there’s some real fun!

The Reader’s Digest version of the Social Security report is extremely simple. The “trust” fund is now solely comprised of notes receivable from the federal government and expenditures far exceed income. At the current rate, the program will deplete all its funds, some programs (disability) in as early as 2 years. To us, it’s a little like small fire in the home. It’s a matter of time.

Most of us are aware of the federal government has already borrowed and spent the Social Security reserves and will do so in the future on an ongoing basis. What many remain blissfully unaware of is that 100% of all the Social Security funding elements will be fully depleted within the next twenty-five years. More urgently, the disability fund will be depleted in 2016. That is certainly not a pretty picture for future generations.

The report is clear: tax increases and benefit reductions in combination must occur and lawmakers need to act. At JL Davis, we believe they will only act at the last possible moment. We believe that means testing, advanced retirement ages, tax increases and benefit reductions are coming. And soon.

The Fed minutes on the other hand are quite encouraging. The report cites significant improvement in labor markets and various economic metrics across the country. So, the Fed is acting to reduce “stimulus” (i.e. bond purchases) and will continue to do so. Interest rates and inflation are currently in check, though concern exists for the future. No real news there.

So, from our point of view the message is clear in regard to both these missives. Work, save, and invest. Plan for the future. Especially right now!**

Lee and Jeremy

http://www.federalreserve.gov/monetarypolicy/fomcminutes20140730.htm
http://www.ssa.gov/OACT/TRSUM/index.html


Market Week: September 2, 2014

The Markets

Investors brushed off geopolitical fears last week and regained their appetite for risk, taking the S&P 500 to its 32nd record high of the year and returning the small-cap Russell 2000 to positive territory for 2014. Meanwhile, the yield on the benchmark 10-year Treasury hit a level it hasn't seen in more than a year as higher demand pushed prices up.

Last Week's Headlines

•The U.S. economy grew slightly faster during the second quarter than previously thought. The Bureau of Economic Analysis said the 4.2% figure for gross domestic product was revised upward from 4% primarily because of a higher figure for commercial construction and business investment in equipment. Meanwhile, corporate after-tax profits rebounded from a -16.3% decline in Q1, rising 8.3% during Q2.
•A 318% increase in orders for commercial aircraft led to a 22.6% surge in durable goods orders in July. The Commerce Department said that excluding transportation, orders actually fell 0.8%, while business investment in equipment was down 0.5% after a strong gain the previous month.
•Sales of new homes fell 2.4% in July, according to a Commerce Department report. That raised questions about the state of the housing market, especially since the National Association of Realtors® had reported the previous week that home resales had actually risen 2.4% during the month.
•Meanwhile, home prices showed continued signs of leveling off in cities measured by the S&P/Case-Shiller 20-City Composite Index. Though the index gained 1% in June and was up 8.1% year-over-year, all 20 cities experienced slower annual growth rates for the first time since February 2008. An S&P spokesman predicted that mortgage rate increases, anticipated next year, "will further dampen price gains."
•Americans spent less and saved more in July as income growth slowed. The Commerce Department reported that consumer spending was down 0.1%, in part because of reduced auto and department store sales, while incomes rose 0.2% rather than the 0.5% seen during the previous two months. As a result, the savings rate hit 5.7%--its highest level since late 2012.
•Burger King became the latest company to draw fire for so-called "tax inversion" by announcing it is negotiating to buy Canadian chain Tim Hortons. The agreement would allow Burger King to move its headquarters to Canada and reduce its corporate tax burden.
•The inflation rate in the eurozone continued to slide, hitting 0.3% in August. The decline, coupled with European Central Bank President Mario Draghi's stated willingness to consider additional economic stimulus, prompted speculation that the ECB could take action at its next meeting on September 4. The eurozone unemployment rate was 11.5%, down only slightly from a year earlier.


Key Dates/Data Releases

9/2: ISM manufacturing report, construction spending
9/3: Factory orders, Fed "beige book" report, auto sales
9/4: ISM services report, balance of trade, business productivity/costs, European Central Bank meeting
9/5: Unemployment/payrolls


Eye on the Week Ahead

In addition to monitoring an onslaught of economic data, global investors will look to the European Central Bank's Thursday meeting for possible stimulus measures similar to the ones the Federal Reserve has been winding down.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.


Prepared by Lee Davis** and Broadridge Investor Communication Solutions, Inc. Copyright 2014