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Fed Chairman Ben Bernanke is acutely aware of the significant impact his words have on the movement of the US stock and bond markets. As the nation’s head banker for the last 4 ½ years (with a severe global recession occurring during the most recent 2 ½ years), Bernanke has learned to carefully select the tone of every sound bite he utters. In a speech delivered last Friday (8/27/10) in Jackson Hole (WY), Bernanke deftly navigated through a dialogue that was one part “reassurance” and another part “confidence.” The “reassurance” was Bernanke’s claim that the Fed still has numerous options at its disposal that can stimulate the US economy if and when necessary. The “confidence” was his assertion that the Fed will “do all it can to ensure a continuation of the (nation’s) economic recovery” (source: Federal Reserve).

At the end of 2009, 10% of home mortgages nationwide had at least 1-payment past due and another 5% of mortgages were in the foreclosure process. At the end of June 2010, 9% of mortgages were late and another 5% of mortgages were in foreclosure, indicating that the housing market may not have bounced back yet but may have bottomed out during this year (source: Mortgage Bankers Association).

Before the financial markets close on Friday (9/03/10) for the 3-day Labor Day weekend, the monthly jobs report for August 2010 will be released. Last month’s (i.e., July 2010) +71,000 jobs gains in the private sector were more than offset by 202,000 job losses by government workers (source: Department of Labor).

Notable Numbers for the Week:

1. A LONG RUN – The S&P 500 lost 0.3% (total return) in the 1930s (an aggregate return for the 10 years, not per year). The next 6 decades (1940s through the 1990s) each produced positive returns. 3 of the 6 decades had gains of at least +400%. The decade of the 2000s was down 9.1%. 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).

2. A SECOND CHANCE – A total of 781,160 individuals filed for bankruptcy protection during the first 6 months of 2010, an average of 4,316 per day and +99,943 greater than the 681,217 filings from the first half of 2009. 73% of the 781,160 filed for Chapter 7 protection as opposed to Chapter 11 or 13 (source: Amer. Bankruptcy Institute).

3. JUST SEVEN YEARS – Even though many homebuyers take out a 30-year fixed rate mortgage when buying a home, few people keep the mortgage for the entire 30 years. The average lifespan of a 30-year fixed rate mortgage is only 7 years (source: Financial Times).

4. MORE THAN ONE-THIRD – 37% of the 6.8 billion people in the world live either in China or India (source: World Health Organization).

Veracor Principals
Chris Broyles Frank Cochran Ryan Coker John Ellard
Barry Hyman Martin Isenberg

The Federal Reserve announced last week that they will begin to roll over maturing mortgage-backed securities from its balance sheet into the purchase of Treasury bonds. The first of these proceeds that will find their way into government bonds will occur tomorrow (8/17/10) and will total $18 billion this week and as much as $300 billion over the next 12 months. Such efforts by the nation’s central bank should keep interest rates down, news that is always welcomed by consumers and corporations. If the Fed succeeds in getting banks to lend more money and consumers to spend more of those borrowed dollars, we may finally put our nation’s recession (which began in December 2007) in our economic rear-view mirror (source: Federal Reserve).

The US stock market reacted to the Fed’s news from last week much like a hospital patient hearing a doctor’s plan for the aggressive treatment of a serious ailment: relieved to know that the medical professional may have identified a solution that will eliminate the patient’s pain, but sobered by the enormity of the effort that is required. As last week progressed, the S&P 500 stock index gave back all the gains it had achieved earlier this month, finishing its trading on Friday (8/13/10) down 2.0% YTD on a total return basis (source: BTN Research).

The Treasury Department will hold a conference tomorrow (8/17/10) on the future of mortgage giants Fannie Mae and Freddie Mac. Since being taken over by the US government on 9/07/08, taxpayers have paid $148 billion to prop up the 2 GSEs (government sponsored enterprises, i.e., corporations created by Congress). In February 2010, the Congressional Budget Office (CBO) projected that the bailout of Fannie and Freddie will ultimately cost taxpayers $380 billion through the year 2020 (source: CBO).

Notable Numbers for the Week:

1. GLOBAL BUSINESS – 47% of the sales of the S&P 500 companies in calendar year 2009 were made outside the United States. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market (source: S&P).

2. SPEND, SPEND, SPEND – The 6 largest monthly deficits ever in the history of the United States have occurred since February 2009, including the all-time monthly record deficit of $221 billion from February 2010 (source: Treasury Department).

3. WORKING FOR THE GOVERNMENT – 1 out of every 6 American workers is employed by the government, either at the federal, state or local level (source: Department of Labor).

4. THEY EARN, THEY PAY, THEY SPEND – To rank in the top 5% of earners in the USA required an adjusted gross income level of $160,000 or higher (data from 2007 tax returns). This group paid 61% of all federal income tax and is estimated to account for 37% of all spending by consumers (source: IRS, Moody’s).

Veracor Principals
Chris Broyles Frank Cochran Ryan Coker John Ellard
Barry Hyman Martin Isenberg

It was not the employment numbers that market watchers or politicians were hoping for last Friday (8/06/10). The 131,000 job losses nationwide in July followed a revised 221,000 worker reduction in June (the latter total was originally estimated at 125,000). The 131,000 drop was a combination of 71,000 job gains in the private sector, offset by a 202,000 cutback in government employees. More than 70% of the lost government jobs were temporary census workers. What it all means is that the Federal Reserve has one more complicating factor that may keep them on edge as they meet tomorrow (8/10/10) for their 5th scheduled meeting of 2010. Investors and Fed Chairman Ben Bernanke are both asking “what more can the Fed do to help?” Short-term interest rates have been maintained at near zero since mid-December 2008, leaving the Fed little wiggle room on that front (source: BTN Research).

The US government is offering $74 billion of treasury securities in auctions to bond investors over 3 trading days this week. $33 billion of the total will be used to rollover existing treasury securities and the remaining $41 billion will be new funds raised. Last week’s 4.49% average interest rate for a 30-year fixed rate mortgage was the index’s 6th record low in the last 7 weeks (source: Treasury Department, Freddie Mac).

The White House has stated its case in the battle over the 2001 and 2003 Bush tax cuts for Americans earning more than $250,000 a year (note that to rank in the top 2% of taxpayers required an adjusted gross income of $261,000 or more in 2007). The Senate is expected to take up the debate next month but a vote to extend (the Republican choice) or to end (President Obama’s choice) the tax cuts to high-income earners may be put off until after the November 2010 elections (source: Senate, House).

Notable Numbers for the Week:

1. FIVE PERCENT CHANGE – The S&P 500 gained +7.0% (total return) during the month of July 2010, the 3rd consecutive month where the stock index has gained or lost at least 5%. During the 4 calendar years of 2004-07, the S&P 500 did not have a single month in which a gain or loss of at least 5% occurred. 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).

2. PLANNING AHEAD – The national personal savings rate in the USA was 6.4% in June 2010, its highest level since June 2009. The rate was just 1.8% in June 2007 (source: Bureau of Economic Analysis).

3. LESS THAN FIVE PERCENT – The population of the USA is 310 million. Only 1 out of every 22 people in the world is an American (source: Census Bureau).

4. GET OUT – A total of 527,906 homes were seized by lenders from delinquent homeowners in the first 6 months of 2010, an average of 2,917 per day (source: RealtyTrac).

Veracor Principals
Chris Broyles Frank Cochran Ryan Coker John Ellard
Barry Hyman Martin Isenberg

The S&P 500 bounced back in July 2010 with its best month of the calendar year by gaining +7.0% (total return). The strong result snaps a 2-month slump for the stock index (both May and June were losing months) and leaves the S&P 500 down just 0.1% YTD as of last Friday (7/30/10), 7 months and 30 weeks into the current year. 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).

Deflation has been on the mind of St. Louis Fed President James Bullard. Comments from Bullard in a published paper last week warned that the US is “closer to a Japanese-style outcome today than at any time in recent history” (i.e., deflation, defined as a wide-ranging fall in the prices of goods and services, as well as the incomes of Americans). Bullard, a voting member of the Federal Open Market Committee in 2010, is considered to be one of the more “hawkish” Fed members, i.e., a policymaker who is more likely to attack potential inflation early with rate increases (source: Federal Reserve).

Congress will be in session just 1 more week this summer before beginning, as the House describes on its website, a 5-week “Summer District Work Period.” In a survey taken early last month, only 11% of Americans expressed confidence in the legislative work currently being done by Congress, setting the stage for spirited dialogue between House and Senate members and their constituents in the coming weeks (source: Gallup).

Veracor Principals
Chris Broyles Frank Cochran Ryan Coker John Ellard
Barry Hyman Martin Isenberg

At the end of the lease on the car, deciding to keep it may become a viable option. If any of the reasons below apply to their situation, you may want to consider buying out the car.
• The buy-out price in your contract makes buying out the car a great deal
• You know the car’s mechanical history and know it’s very reliable
• You don’t want the hassle of starting a new lease or shopping for a new car
• You’ve exceeded the number of miles allowed and don’t want to pay a penalty
• There is excess wear and tear on the car, and you want to avoid the extra fees
To start out, it is a good idea to check the residual value on your car in the lease contract. Once you know what you can buy your car for, you can now check a true market value of the car. If the True Market Value price is the same or higher than the residual value of your car it may be a good deal to buy out the lease. If the True Market Value price is less than the residual price you may still be able to negotiate a lower price for your leased car. It is important to remember that the car company really does not want that car back and would probably sweeten the deal to try to encourage you to buy the car.
A good place to find the True Market Value price is on Edmunds.com
To get started with buying out your lease you must first call the number listed on your monthly payment slip. Choose the “lease end options” and ask for your buyout amount. When you are talking to the representative do not tell them if you have gone over your allowed mileage or you have excess wear and tear. They may up your price because of this. Always allow several weeks to negotiate a buyout figure for your leased car.

I have grown up knowing that the Great Depression left many Americans of that era afraid to trust banks with their money. However, I did not realize that many people of my generation in their 20’s still felt this way. Talking to a few friends that work with me in the service industry led me to find out I am one of the few with either a bank account or a bank account that is used on a regular basis. Some of them do not wish to have a bank account for multiple reasons including to avoid paying taxes, to avoid over-drafting when they do not have the money, or simply because they do not trust the banks with their money. I have heard many stories of people actually over-drafting on their account so much that they simply close out their bank account and walk away. My question is, will the new law requiring banks to get customers’ permission before charging them fees to cover debit card and ATM withdrawals sway the people I know into signing up for a bank account? One person I spoke with thought about it for a minute and decided that she now probably trusted banks less considering they are going to be losing so much money by not charging their customers overdraft fees. All of this simply to gain more business? She doesn’t buy it. Considering the banks made $20 billion in overdraft fees last year, I can definitely see her point. Another person I spoke to was actually in the process of opening up a bank account for the second time in his life because he had recently run across trouble trying to rent out a house due to lack of credit. He realized that he needed not only a bank account but a credit card as well. He was very happy about the new overdraft fee law because he said he had already racked up $2,000 in fees in his life and did not want to go down that road again when he opened up a new account. He did say that the new law did not sway his opinion in the end. Time will only tell if more people will jump in line and sign up for a bank account knowing they won’t be charged overdraft fees. All in all, I just think that people are very sensitive when it comes to their money and only trust themselves to hold onto it.

In March of 2010, Bank of America attempted to gain the trust of their customers by getting rid of the pesky overdraft fees that can be charged by everyday purchases on debit cards or ATM transactions. Many banks, including my own, BB&T, have jumped on board with this idea in an effort to build a stronger relationship with their customers after the recent financial crises. As of July 1st, the Federal Reserve will require that bank’s obtain a customer’s consent before they can charge them overdraft fees for ATM transactions and debit purchases. Last year banks generated about $20 billion from overdraft fees on debit purchases and ATM transactions and $12 billion more by covering checks and recurring bills. Overdraft protection will still be available, typically for a fee of $10, to customers who link their checking accounts to savings accounts or credit cards. Many customers seem to be more content with having overdraft protection on mortgage checks and recurring bills but do not want the coverage for everyday purchases. I was made aware of these changes by a phone call I received from BB&T requesting that I respond to a letter they were sending me regarding my preferences on overdraft protection. Instead of replying by letter I simply logged onto my bank account online, checked a few boxes, and now I am finally free from those pesky $35 overdraft charges that could turn a cup of coffee into a $40 purchase. I have recently become aware of the numerous friends I have in the service industry without bank accounts who deal strictly in cash. I have asked many of them why and a lot of the time the answer lies in the overdraft fees and the trouble they have gotten into with their banks because of them. Tomorrow’s blog will explore if this new-found change in overdraft policy will affect their decision in opening a new hank account.

The Shooting Star

I grew up in Cincinnati, Ohio, home of the Big Red Machine, Skyline Chili and Graeter’s Ice Cream. But what I remember most about being a kid in Cincinnati is the Shooting Star roller coaster ride at Coney Island amusement park.

The Shooting Star was one of the fastest, tallest, scariest roller coasters in the Midwest. I can remember getting into a car, the bar coming down on my lap to secure me in the compartment, and then hearing the clanky sounds as we moved to the top of the world. As we approached the top of the platform, our car stopped, and an eerie silence descended on us right before we plunged to the ground. Then the car jerked us back up a long hill at horrific speed before making a sharp right turn and then a left turn…

As I watched the markets during the second quarter, I thought a lot about the Shooting Star. And about the headwinds and tailwinds that were the subject of my last issue of the Peachtree Quarterly. It seems that as the second quarter came to a close, there were a lot more headwinds than tailwinds, especially when compared to the previous few quarters.

In short, the second quarter was virtually the opposite of the first quarter of 2010. The broad equity market had been climbing more or less steadily upward since March 9, 2009, on stronger corporate profits and expectations of future growth. Then we were hit with the fallout from economic issues facing Greece, Portugal, Spain and some of the other European countries, an intraday 10% correction, the end of the housing tax credits, and continued high unemployment. As a result, in the second quarter the market gave up its gains from the first four months of the year and closed down more than 11%. No sector or company escaped the battering.

So what happens now? Certainly we know there are still strong headwinds. We read about them in the business periodicals and hear about them on cable TV. And they are real. The government continues to run up debt and seems unable to make any meaningful changes. And as both parties gear up for the midterm elections, the likelihood that they will work together grows even more remote-at least until the fall. The public lacks confidence, in the government and in the economy. Banks are hoarding cash, worried about what the economy will do, and that makes less money available for companies looking to grow.

But let’s not forget that there are still some tailwinds out there. For example, unlike the government, the private sector has lots of cash. In fact, corporate balance sheets are showing $1.8 trillion in cash. In addition, carload volume growth on rail trains continues to be solid. The International Monetary Fund raised its global growth forecast and now expects the world economy to expand 4.6%, compared to April’s 4.2% projection.

But I believe the most important tailwind is valuation. With S&P 500 corporate profits estimated by Wall Street analysts at $78 per share on a composite basis for 2010 and around $90 for 2011, the market is not overvalued. In fact, the companies in the S&P composite are now selling at around 13 times this year’s earnings and only 11 times next year’s earnings, according to Wall Street analysts. Some very large and very well-known companies are selling at close to single-digit price-earnings ratios on next year’s projected earnings. These include companies like ATT, Alcoa, Bank of America, Chevron Corp, Exxon Mobil, Hewlett Packard, IBM, Intel, Merck, JP Morgan, Pfizer and Travelers. These are much more attractive valuations than we saw a decade ago, when investors could not seem to buy stocks fast enough.

Of course, part of the reason for the difficulties of the last year can be traced to that rush to buy overvalued stocks, but the fact remains that when you look at the financial realities of companies, there is plenty of reason to be optimistic and own their stock.

And don’t forget the ability to make money on dividends, which have comprised approximately 50% of the stock market’s total return since 1930.

So what’s the takeaway from all this? The situation remains serious. Consumers are still struggling, and long-term growth depends on consumers having money to spend and the confidence to spend it. Problems in Europe and elsewhere continue to be a drag on the world economy. The U.S. government seems alternately unable to do anything, then willing to tackle huge reforms that, even if they are needed, will have an unknown impact long-term.

But things are not as dire as the talking heads on TV would have us believe-they rarely are. Especially in challenging times, the best approach continues to be to invest in strong companies that pay a dividend, and to think long-term. In the end, the poor performance in the second quarter is no more important than the strong performance in the first. What matters is what the economy does over many, many quarters.

Just like when I rode the Shooting Star all those years ago in Cincinnati, the ride can be terrifying. But what really matters is getting safely back to where you want to be.

Garry K. Schaefer
Atlanta, Georgia
July 14, 2010

Peachtree Investment Quarterly may offer general financial, insurance, tax and business ideas. However, due to the ever-changing tax laws as well as the complexity of the financial industry, you should seek professional advice before implementing any of the ideas contained in this newsletter. Peachtree Investment Partners, LLC, and Osmosis Digital Marketing, Inc. assume no liability whatsoever in connection with the use of this newsletter.

Many families may struggle with the decision of whether to move out of the apartment in the city when they start a family and have kids. Some may want to stay because of the friends they have made and their easy access to work. There are also many positive aspects to moving to the suburbs including easy access to public schools and more space for your children in the house. A study done by the New York Times says that a suburban lifestyle costs about 18 percent more than living in the city. That amazes me because I thought the opposite. When you think about it houses do costs more to keep running than that apartment in the city. There is also the aspect of having to own a car and car insurance and paying for commuting to and from work if one lives in the suburbs. In their study, the deciding factor lied in private schooling. If the parents do decide to stay in the city in an apartment they may have to send their children to private schools and that will definitely change their study and make living in the city more expensive than the suburbs. I have always thought that by living in a house in the suburbs is more affordable but it is nice to know that living in the city has its financial perks as well.

The recent oil spill that has tragically occurred in the Gulf Coast has unfortunately been a lesson to many investors that diversification really does matter. Many people that own BP shares and rely on dividends for retirement are in serious trouble. If anything can be taken out of this horrible situation by someone who was not a BP stock owner, the importance of diversification would be the key. Everyone usually thinks that the one company they have invested their money into and rely on in the future will always be stable, until they are not. The bottom line of the story is to diversify within each class that you own. This includes dividend paying stocks as well as municipal bonds. On top of this you should also diversify your retirement income. Diversification might not always protect you from financial crises such as those seen in 2008, but it will definitely help you to avoid the troubles of those who are solely invested in a single stock like BP right now.