Weekly Investment Market Update
July 7, 2008

In a storyline that has been repeated far too many times in 2008, the price of oil rose (setting another 4 record closes) and the stock market fell last week.  At $145.29 a barrel, the price of oil is up +51% YTD.  The S&P 500 dropped to a 2008 low last Wednesday (1262), finishing the trading week down 19.3% from the index’s all-time record high set in October 2007 (source: BTN Research).

The country’s employers reported 62,000 fewer jobs in June from a month earlier.  The 8.5 million unemployed Americans is the largest total of idled workers nationwide since November 2003 (source: Department of Labor).  The global threat of inflation forced the hand of the European Central Bank to raise its key benchmark interest rate last week.  Their rate-tightening action runs contrary to that of the US Federal Reserve which may straddle the fence for some length of time, i.e., neither raising rates to slow our rising inflation nor lowering rates to spur on our slowing economy (source: BTN Research).

The companies in the S&P 500 will begin to report their 2nd quarter earnings during the upcoming week, results that are expected to be 9% less than the actual totals reported for the same 3-month period in 2007.  Such an outcome would be the 4th straight quarterly earnings decline, a streak that is projected to end when 3rd quarter results are made public in October (source: Financial Times).

Notable Numbers for the Week:

SOMETHING IS OUT OF WACK - Assuming proven oil reserves of 264 billion barrels, the value of Saudi Arabia’s oil “in the ground” as of 6/30/08 (valued at $140 a barrel) was $37 trillion, more than 2 ½ times the value of the total US stock market ($14.1 trillion) as of the end of last month (source: BP Global, Wilshire).

COAL, NOT OIL, FOR NOW - 80% of the power produced in China is generated from coal (source: Financial Times).

MORE NEED TO DO MORE - Only 19% of working Americans are saving enough to allow them to maintain their current standard of living into their retirement years (source: BusinessWire.com, Hewitt Associates).

SEPARATE FROM MEDICARE - A 65-year old couple would need to set aside $215,000 today (i.e., a present value amount) in order to cover their out-of-pocket health care expenditures over the subsequent 15-year period (source: Fidelity, Barron’s).

US energy officials have been critical of the Chinese government and the oil subsidies it provides to its citizens.  By maintaining caps on the retail price of gasoline and diesel fuel, a Chinese consumer has felt little of the effects of the worldwide rising price of oil.  Where the demand for gasoline and diesel fuel in the USA and Europe has been flat to declining, the demand in China has continued to grow rapidly.  But last Thursday, the Chinese government announced that the mandated price of gasoline and diesel fuel would go up by at least +17%.  China thus becomes the 5th country worldwide in the last month to reduce their oil subsidies, effectively passing more of the rising cost of energy onto the end user (source: Financial Times).

A rift within OPEC was apparent last week as Iran and Venezuela voiced displeasure with Saudi Arabia’s decision to unilaterally increase its daily oil production in response to pressure from the USA (source: OPEC).

The Fed will hold a 2-day meeting tomorrow and Wednesday, its 4th scheduled meeting of the year.  Although few market watchers expect any rate action (either up or down), more significant may be the tone of the Fed’s statement that will be released on Wednesday afternoon (source: Federal Reserve).

Notable Numbers for the Week:

CHANGING DIRECTIONS - Following Fed Chairman Ben Bernanke’s comments 2 weeks ago that shifted the focus of the nation’s central bank from a slow-growth economy to that of rising inflation concerns, the Fed funds futures market reflected last Friday (6/20/08) a 43% chance of a rate hike at the Fed’s 8/05/08 meeting.  If the Fed does raise rates at its August meeting, that action will come just 97 days after its most recent rate cut, the quickest turnaround from “cutting to increasing” since March 1988 (source: Federal Reserve, Wall Street Journal).

NOT FOR ME - 78 million Americans born between the years 1946-64 are traditionally defined as “baby boomers.”  A survey of 1,000 baby boomers found that only 37% of this group would be satisfied if they had the same retirement lifestyle in the future as their retired parents have today (source: NAVA).

NOT A LOT - Only 2% of “baby boomers” who have been the recipient of a bequest from a deceased relative have received an inheritance that exceeded $100,000 (source: Tiburon Strategic Advisors, WSJ).

LONGER AND LONGER - The life expectancy of an average American has increased +5.2 years in the last 30 years.  A new-born baby has a life expectancy of 78.1 years today (source: NCHS).

There are several reports due this week that could "plague" the markets and home loan rates. Tuesday will bring the wholesale inflation measuring Producer Price Index, as well as a read on the housing market via the Housing Starts and Building Permits Report.

Also, on Thursday, the Philadelphia Fed Report hits the wires. This monthly survey of manufacturing purchasing managers conducting business around the tri-state area of Pennsylvania, New Jersey, and Delaware is one of the most-watched manufacturing reports, and it will be important to see if concerns about inflation have had an impact.

Remember when Bond prices move higher, home loan rates move lower...and vice versa. The chart below shows how Bond prices moved sharply lower last week on inflation concerns, so stay tuned this week! If inflation continues to shake up the markets, Bond prices and home loan rates could have another troublesome week...but prices are at the same low levels they hit last year before starting to improve. Oftentimes, history repeats itself, and should Bonds receive some friendly economic news, it is likely they will gain back some of the ground recently lost.

You can now cross off from your “never in my lifetime” list that gasoline will exceed $4 a gallon in this country.  The national average price of gasoline went above that previously unthinkable level for the first time yesterday ($4.005 a gallon).  One year ago today, Americans were paying $3.11 a gallon at the pumps (source: AAA).

Two reports to be released this week may highlight the ongoing impact of a weak US dollar to our economy.  Tuesday brings the April trade deficit total (note a weak dollar makes our exports cheaper to foreign buyers) and on Friday, the inflation report for the month of May is published (note a weak dollar makes the foreign imports we buy more expensive) (source: BTN Research).

Notable Numbers for the Week:

THREE VERY GOOD DAYS - In spite of the fact that the S&P 500 is down 3.8% YTD through 5/31/08, 3 of the best 50 percentage gain days from the last 50 years took place in March and April of 2008.  The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market (source: BTN Research).

LESS RISK - More than 2 out of every 5 investors (41%) who have lost money in the stock market in the last year have adjusted the asset allocation of their investments to reflect lesser risk exposure in the future.   More than 1,000 Americans at least age 45 were surveyed for this data (source: AARP).

SIZE OF PROFIT - The average profit margin at the pump for a US gas station is 11 cents a gallon, approximately half the size it was just 1-year ago (source: Fortune).

TROUBLED LOANS - US commercial banks and savings institutions set aside $37 billion in loan-loss provisions in the 1st quarter 2008 in anticipation of bad loans that may default.  Banks set aside $9 billion for shaking loans in the 1st quarter 2007 (source: Federal Deposit Insurance Corporation).

The bond market showed signs of inflation concerns last week as the yield on the 10-year Treasury note closed on Friday at 4.06%, the first time it has ended a trading week above 4% since late December of last year.  The Fed, which doesn’t meet again for 3 weeks, will evaluate economic data to determine if/when they need to raise rates as inflation expectations change in the financial markets (source: BTN Research). 

Democrats Hillary Clinton and Barack Obama continue to fight for delegates in their party’s final primaries to be contested tomorrow in South Dakota and Montana, just 5 months to the day after the initial caucuses in Iowa.  Clinton officially announced her run for the White House on 1/20/07, just 3 weeks before Obama began his campaign on 2/10/07 (source: BTN Research).  

Notable Numbers for the Week:

BIG AND REALLY BIG BUSINESS - 43 publicly-held US companies produced at least $1 billion of sales per week in 2007.  But just 2 companies generated at least $1 billion of sales a day for the year (source: Fortune). 

ALMOST EVERY DAY - The national average price of a gallon of gasoline set an all-time record high on 51 of 61 days during the months of April and May this year, peaking at $3.97 a gallon on Saturday (source: AAA). 

TOO MUCH TO HANDLE - 55% of all personal bankruptcies in the United States occurred at least in part due to medical expenses that the debtor was unable to pay.  E.g., medical expenses due to illness, injury, death of a family member, or the birth of a new child (source: Health Affairs).  

I WANT IT NOW - A person born in 1946 is eligible for full Social Security retirement benefits at age 66 or in 2012.  If that individual elected to take his/her benefits early at age 62 (i.e., in the year 2008), the monthly checks will be permanently reduced by 25% vs. what he/she would otherwise receive at his/her full retirement age (source: SSA).

The national average price of gasoline continued its march to $4 a gallon last week (peaking at $3.94 on Memorial Day), a price most Americans thought they would only pay while on a European vacation.  Since the first of April, the national average price of gasoline has set all-time records on 46 of 56 days.

The impact of higher gas prices may be reflected in the growth of the economy during the 1st quarter that will be reported on Thursday.  The original estimate (released a month ago) indicated just +0.6% annualized growth occurred during the first 3 months of 2008, well below the nation’s +3.4% average growth from the last 50 years.

Notable Numbers for the Week:

A DEPRESSION - During the worst financial times of the Great Depression in 1933, approximately 1,000 home loans were foreclosed each day.

LITTLE CASH, A LOT OF DEBT - 46% of the mortgages taken out by US home buyers in calendar year 2006 utilized greater than 95% financing, i.e., the home buyer put less than 5% down.

WEALTHY FOLKS - 1 out of every 11 US households has at least a $1 million net worth not counting the value of their primary residence.

OLD OIL - Worldwide demand for oil in calendar year 2008 is expected to be 87 million barrels a day.  20% of all the oil consumed globally comes from oil fields that are at least 40 years old.