WHEN WILL THE DEBT CEILING AFFECT STOCKS?

WHEN WILL THE DEBT CEILING AFFECT STOCKS?

Will the markets feel stress as the deadline to raise the debt limit approaches?

Presented by Kip A. Hoover

August 2 looms. That is the absolute deadline for raising the federal debt ceiling, according to Treasury Secretary Timothy Geithner. The U.S. actually “hit” the $14.3 trillion ceiling on May 16 but took “extraordinary measures”, in Geithner’s words, to avoid default. (Those measures included suspension of Treasury payments to the Civil Service Retirement and Disability Fund and the Federal Employees' Retirement System Thrift Savings Plan.) While Congress will surely vote to raise the debt cap by August 2, our politicians are mostly transmitting contention.^1,2

                     

Will other nations start to lose confidence in us? Our markets are pretty confident that Congress will resolve the issue. Still, the mere prospect of a default could end up doing some damage on Wall Street (and Main Street). The longer Congress dallies, the more the world questions how serious our politicians are about reaching an accord. Remember the headlines about the debt crises in Greece, Spain, Ireland and Portugal? Remember how that instability weighed on Wall Street? Well, we could give global investors a sense of déjà vu.

Bond yields could rise. We last hit the federal debt limit in 1995. Before Congress hiked it, Treasury yields rose in the preceding months. Some analysts think that if they head north just a quarter-percent as a result of this current impasse, taxpayers could collectively be on the hook for up to $500 million per month.³

If Treasury yields rise, businesses big and small will feel the pain. They want and need loans; they need to repay existing debts. They don’t need pressure on interest rates.

The world isn’t walking away from us yet. Our debt remains very attractive to foreign investors. Foreign ownership of U.S. Treasuries climbed from 37% in 1997 to 57% in 2010, and foreign governments were responsible for most of the increase.³

The dollar is still the world’s reserve currency. That fact alone will insulate us a bit in the short term. (What other currency could serve as a benchmark? The euro? Look what’s going on with that.)

When S&P downgraded the U.S. credit outlook this year, did global markets correct? No. Other economies hold a great deal of faith in ours. If our legislators get their act together, we can avoid anything reminiscent of what occurred recently in Europe.

Kip A. Hoover may be reached at 440-729-0036 or kip.hoover@lpl.com.

www.goodmoneycents.com

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty.

Citations.

1 - guardian.co.uk/business/2011/may/16/us-government-hits-debt-ceiling [5/16/11]          

2 - npr.org/blogs/thetwo-way/2011/05/16/136356437/debt-limit-reached-treasury-to-stop-investing-in-pension-plans [5/16/11]

3 - curiouscapitalist.blogs.time.com/2011/05/16/14292/ [5/16/11]            

A CLOSER LOOK AT GOLD

Amid all the hype and euphoria, some history is worth remembering.

Presented by Kip A. Hoover

America’s got gold fever. Internet headlines inform you that gold settled at another record close today. Nightly news segments show you footage of excited sellers and beaming commodities traders. Radio commercials remind you that gold has outperformed stocks in the last decade. How should you respond to all this?

There’s no doubt that in recent history, the performance of gold is startling. Across the 2000s, gold gained 278.52% on the COMEX while the S&P 500 lost 24.10%. In 2010, the S&P 500 advanced 12.78% and gold notched a 29.76% gain.^1,2,3

So given these numbers, why doesn’t everyone put every dollar they have into gold?

Recent price returns don’t tell the whole story. Investing big in gold may seem like a no-brainer – until you take history and inflation into account. In 1980, gold prices were up around $850 an ounce – adjusted for inflation, that’s the equivalent of about $2,300 an ounce today. Yet when 2008 ended, gold prices were at just $870 an ounce. When 2003 started, gold futures were trading at $343 per ounce.^4,5,6

Gold is often seen as a hedge against inflation – but from 1980-2002, annualized inflation averaged 3.55% and gold didn’t exactly keep pace. So if you lengthen the window of historical performance, gold hasn’t always trumped stocks.⁶

Remember, gold is a commodity. Since it tends to have little correlation with stocks and bonds, it can play a significant role in a diversification strategy. On the other hand, gold has no intrinsic value. It doesn’t give you any cash flow. It doesn’t pay you a dividend or earn interest. Gold is only worth what people are willing to pay for it.

Right now, people are willing to pay more than $1,500 an ounce for gold. Three big factors have driven this gold rush - a consistent global demand, an assumption that the dollar will stay weak and a whole lot of speculation.  Remember that precious metal investments involve substantial fluctuation and potential loss and the fast price swings of commodities will result in significant volatility in an investors holdings.

Bubbles can happen; bubbles have happened. Investors who bought gold at $560 an ounce at the start of 1980 had to wait until 4Q 2010 to break even in inflation-adjusted terms. Those who bought gold at $850 an ounce in 1980 won’t effectively break even until gold prices top $2,300. Gold has performed astonishingly well in recent years – but past performance is no guarantee of future success.²

Kip A. Hoover may be reached at 440-729-0036 or kip.hoover@lpl.com

www.goodmoneycents.com

Citations.

1 - cnbc.com/id/34645043 [12/31/09]

2 - blogs.wsj.com/marketbeat/2010/12/31/data-points-us-markets-337/ [12/31/10]

3 - blogs.wsj.com/marketbeat/2010/12/31/data-points-energy-metals-430/ [12/31/10]

4 - marketwatch.com/story/why-gold-is-a-bad-investment-2010-11-12 [11/12/10]

5 - seekingalpha.com/article/113174-2008-precious-metals-performance-gold-silver-platinum [1/4/09]

6 - montoyaregistry.com/Financial-Service.aspx?financial-service=retirement-planning&category=3 [5/1/11]

6 - moneywatch.bnet.com/investing/blog/wise-investing/should-you-add-gold-to-your-portfolio/2251/ [4/8/11]

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.