Week of June 4, 2007

The Markets
 
Pass it forward: Good economic news in America helped European markets gain last week.

It appears that inflation worries will keep the Federal Reserve from lowering interest rates any time soon. Last week, the Fed’s Open Market Committee minutes were released, and they indicated that the Fed still considers inflation to be the greatest threat to the American economy, according to Barrons.com. While the Fed’s inflation concerns have dampened markets on previous occasions, last week they had less effect as markets were buoyed by positive economic news. More new jobs were created in the United States than analysts had expected. The U.S. manufacturing index rose by more than experts had anticipated. And consumer sentiment was strongly positive. These pieces of news encouraged investors and pushed markets higher, according to Reuters. In the United States, it helped the Dow and the Standard & Poor’s 500 reach record highs during the week, and helped the NASDAQ rise to a new six-year high.  

Signs of a strengthening American economy had positive effects on markets overseas. European shares rallied on reports of strong U.S. economic data, and the benchmark pan-European FTSEurofirst 300 index closed at its highest level in more than six-and-a-half years, according to Reuters.

Source: Yahoo! Finance, Barrons Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly. Three-, 5-, and 10-year returns are annualized.  Assumes dividends are not reinvested.

What do you suppose the savings rate in AMERICA was when Franklin Delano Roosevelt was sworn in as President of the United States? Remember, the Great Depression was underway and one-quarter of the population was out of work. People were spending any savings they had just to stay afloat financially. In 1933, the personal savings rate in the United States was negative 1.5%. People were spending more than they were saving, which is understandable.

Now, consider the year 2006. The economy was stronger than it was in 1933. Unemployment was relatively low. People had jobs and were earning significant income. What do you suppose the savings rate was in 2006? According to the Commerce Department, Americans saved negative 1% of their disposable income last year! That means we spent every penny we earned, and then we spent more.

Should we be worried? If you’re not meeting your personal savings goals, perhaps you should be worried. However, you may not need to worry about the national savings rate—yet. The Bureau of Economic Analysis does not include capital gains earned on investments or increases in the value of housing in their savings calculations. As a result, even as Americans have been spending more and borrowing more, their overall net worth has continued to go up because their assets have appreciated faster than they have been spending, according to Federal Reserve Board statistics. Of course, if the market turns down or housing prices depreciate significantly, then our failure to save could become a concern.

WHAT IS A TRADE DEFICIT? Countries keep track of how much they buy from, and sell to, each other through a measure called “balance of trade.” If a country exports more goods to another country than it imports (sells more to other countries than it buys from them) then it has a favorable balance of trade, or a trade surplus. If a country imports more than it exports, it has a negative balance of trade, or a trade deficit.

Is a large trade deficit, like that of the United States, a problem? According to experts, it’s not—as long as the dollars we export to the rest of the world are used to buy U.S. assets like stocks, bonds, government debt, real estate, and American businesses. A problem could arise if foreign investors lose confidence in the U.S. economy and stop investing in U.S. assets. If that happens, then the supply of dollars in the world banking system could become greater than the demand for them, and the value of the U.S. dollar could fall.

Weekly Focus – How many hours do you spend at work each week? According to the Center for Work-Life Policy, the new standard for Americans who want to advance in the workplace is 70 hours per week. The study found that 1.7 million Americans have “extreme” jobs which require this type of time commitment. The jobs are primarily held by men for whom work becomes an extreme sport. They push themselves as hard as they can, working “around the clock and around the globe.”

There is a cost to companies and families. One-half of extreme workers are looking for new jobs. When they leave a company, the replacement cost is estimated to be in the six figure range. In addition, about 60% of extreme workers indicated that their career undermines their relationship with their children. That cost is inestimable.

Best regards,

Fredrick J. Livingston, CLU, CFP

Securities offered through LPL Financial, Member NASD/SIPC

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. 

* The Nasdaq Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.