Holiday Hours Notice: Lowe Wealth Advisors will close at 4:30 pm on Tuesday December 23rd and reopen on
Wednesday December 31st in order to allow our dedicated team to spend time with their families
over the holidays. If you have an urgent need an emergency contact number will be available on
our answering system. Lowe Wealth Advisors will monitor the market during this period of time and if warranted
make any adjustments in our actively managed discretionary accounts.
With the Federal Reserve cutting the target interest rate to a range near zero they have literally fired all of their rate cutting guns at once. The amount of the cut surprised many economists, which is apparently what Ben Bernanke intended.
The Fed wants to continue to send a strong message that they will do everything that is needed in order to stimulate the economy and prevent a depression.
In addition to the interest rate cut the Fed announced that it intends to purchase agency debt and mortgage-backed securities with the intention of providing support to mortgage and housing markets. Further, the FOMC said that it is “also evaluating the potential benefits of purchasing longer-term Treasury securities.
Consumers make up somewhere close to 70% of our domestic economy. As housing prices ran up American’s did not hesitate to use the equity in their homes as credit to spend and keep the economy thriving. Now, American households either cannot or are not willing to borrow for purchases. The corporate sector took about five years to recover from the technology sector bubble burst. By all accounts the total assets lost in the tech bubble is far less than what has been lost in housing values. To think that households could recover from this in a similar period of time in our view is optimistic.
This will likely manifest itself in dismal economic data (especially corporate earnings) in the first few months of 2009. Lowe Wealth Advisors believes that we could see an extended period of below average economic growth. While it may not be identical to Japan’s “lost decade” it most certainly will be a challenging and prolonged period.
Despite the massive government intervention the economy and markets still have many issues to work through.
Industries lining up for “bailouts” or “loans” (which is still a bailout in our opinion until they are actually paid back) will continue to grow. With reportedly over 170 banks on the “watch list” for failure we expect bank failures to escalate in early 2009. The other area of great concern for Lowe Wealth Advisors are pension plans.
Many pension plans have been hit hard by stock market decline. Vast amounts of money in these plans were taken from the stock market and put into Treasury securities. While Treasuries could still increase in value in the short term, at some point soon LWA believes that investors who flocked to them for safety could get badly hurt.
Conceivably, this could set up pension plans for losses both in equities and in bonds. If this does happen it is entirely possible (and very likely) that the assets within pension plans will not be adequate to meet the payout requirements to the beneficiaries of the plans. That means the PBGC would have to step in and yes the burden once again is put on taxpayers. Only time will tell but we feel this scenario is only a matter of time.
Strategy
While we could easily experience days like yesterday where the markets were up 4% to 5% Lowe Wealth Advisors continues to believe that any such gains are not likely to be sustainable. In fact volatility could increase or return to the levels we saw in October and November in early 2009.
Where appropriate, LWA will use the volatility for opportunistic moves in our actively managed portfolios, however our core focus will remain on preservation. We are also continuing to look at asset classes that we believe could compliment the current portfolio allocation. These include natural resources, gold and at some point inverse treasury and high yield bond positions. We are monitoring these asset classes and one or more of them could be added to some or all of our actively managed portfolio allocations in the coming months. (see disclaimers below)
Tax Update:
Lowe Wealth Advisors is in the process of realizing losses in our taxable discretionary accounts. Congress approved legislation that includes a one-year suspension of the required minimum distributions for 2009 for taxpayers who are 70½ and older. Requirements for 2008 remain unchanged. The legislation, H.R. 7327, the Worker, Retiree, and Employer Recovery Act of 2008, passed the Senate by unanimous consent Thursday, December 12, and is expected to be signed by the President.
Lowe Wealth Advisors recommends that you consult with your CPA to determine whether there is an impact to your personal situation.