We are now two-thirds through 2011. Summer has come and gone, and the students are back in full force at Penn State. State College Area School District students are back in class, and Penn State football started last weekend with Joe Paterno still in charge. He became head coach at State the year I joined the family brokerage firm. How time flies.
Since my last article in mid-August, the stock market suffered a steep decline followed by only a partial recovery, registering one of the worst August performances in history. It comes just 30 days after the end of Quantitative Easing II, and before whatever else the Federal Reserve or administration might further prescribe for our ailing economy.
The Federal Reserve’s Bernanke essentially told the administration that the ball was in the White House’s court as monetary policy was about played out. President Obama spoke last week on yet another plan to create jobs and get the economy growing. He recently appointed Professor Alan B. Krueger from Princeton as head of the Council of Economic Advisors.
One of the good professor’s papers points out that the longevity of unemployment is exacerbated by extending unemployment-insurance payments. It will be interesting to see how Krueger sells the president’s economic plans to the electorate. For those of us interested in macro-economic policy and its impact on both the economy and the investment markets, these times are riveting.
So far this year, the major-market averages have gone nowhere. We are about where we started the year. More telling is that gold and silver have soared, rising 29 percent and nearly 34 percent, respectively, year to date.
Other notable gains include McDonald’s, some of the municipal-bond funds and stocks with large and secure dividends like DNP Select Income and MarkWest Energy Partners. Also, global bonds have done OK as measured by Templeton Global Bond Fund and Fidelity New Markets Income Fund. Space doesn’t permit me to list all the good performers here.
On the downside, the financial sector continues to decline and shrink. Perhaps we should not have bailed out the banks and brokers because they continue to contract even after all the bailouts. You can quickly see the decline in one specific ETF, SPDR Financials (XLF). This fund is down more than 17 percent year to date, marking the awful performance of Bank of America (owner of Merrill Lynch) which is down 39 percent; Citigroup Inc., down 34.5 percent; Morgan Stanley, down 37 percent; Goldman Sachs, down 31.5 percent; and Wells Fargo, down 18 percent; and J.P. Morgan, down just 12.6 percent.
Clearly, financials are not in favor with investors. Oh, sure, Warren Buffett jumped in the fray with a $5 billion investment in Bank of America, getting a special preferred stock that is not available to you and me. He got similar deals from General Electric and Goldman Sachs. He may be under water on his buy option prices right now, but he’s getting a great dividend while he waits.
Two notions come to mind as I read the numbers. First, all that money going into gold is money that will not create jobs or grow the economy. Ronald Reagan knew this 30 years ago when he and Paul Volcker changed the game and gold peaked in price around $850 per ounce. Second, even though prices have declined for the major financial institutions, I suspect the pain is not over yet. We just need less banking. You wouldn’t know that seeing all the banks that compete for business in State College, however.
For the balance of the year, much will rest on the president’s shoulders and the ability of Congress to institute policies that promote growth and reduce unemployment. I’m not too optimistic right now that we’ll get the right medicine, but then again I could be wrong. And that underscores our investment philosophy: Pay attention!
