Economic Indicators, Stock Market & Investment Reports
The real growth in the U.S. economy accelerated in the second quarter as the real gross domestic product (GDP) increased at a 1.9 percent annual rate, the Bureau of Economic Analysis (BEA) at the Commerce Department, reported on Thursday, July 31, 2008. The rate was up from 0.9 percent in the first quarter but less than economists were looking for. The economy was boosted by $75 billion in tax-rebate checks from Washington and big drop in imports. The crumbling housing market and by a huge drop in inventories held back the economy growth. Government revisions showed the economy actually shrank in the final quarter of 2007 at a 0.2 percent annual rate before barely edging up at the start of this year. It was the first quarterly plunge for the GDP since the third quarter of 2001 amid the last official recession when GDP shrank at a 1.4 percent rate.
Recession fear keeps looming as more job cuts are expected in coming months and Americans may cut back on spending. A growing number of analysts fear that the economy will slip into reverse again at the end of this year, as any effects of the tax rebates fade. There are also concerns exports could weaken as other countries' economies slow down and overseas demand weaken. A new poll the Pew Research Center released Thursday showed about three in four Americans think the economy is in a recession. By the most common definition, the decline in GDP in the fourth quarter of 2007 was not the beginning of a recession? As a general rule, the economy is in recession when it shows two consecutive quarters of contraction. That didn't happen in the last recession in 2001, which was declared a recession by another reading pronounced by a panel of academics at the National Bureau of Economic Research committee (NBER committee), that usually comes well after the fact. The National Bureau of Economic Research’s Business Cycle Dating Committee, the nation’s arbiter of recessions, has enough latitude to make recession call. GDP is among five key indicators the committee follows to determine a recession, which it defines as “a significant decline in economic activity spread across the economy, lasting more than a few months.”
The department also issued benchmark revisions for the three-year period 2005-2007, which showed growth was weaker in each year than previously thought. GDP grew 2 percent in 2007 instead of 2.2 percent, 2.8 percent instead of 2.9 percent in 2006 and 2.9 percent rather than 3.1 percent in 2005.
Chart: Wall Street Journal Blogs
Most Popular Investment for Long-Term Focus
Majority (75 percent) of U.S. individual investors are currently investing in domestic equities and 60percent in international equities. The figures are revealed on July 29, 2008 by Schroders, a global asset manager, on its semi-annual survey of U.S. individual investors. The survey also revealed that individual investors are continuing to build their portfolios and maintaining a long-term outlook with an investment time horizon of more than five years.
Stock is an instrument that signifies an ownership position (called equity) in a corporation, and represents a claim on its proportional share in the corporation's assets and profits. Ownership in the company is determined by the number of shares a person owns divided by the total number of shares outstanding. Most stock also provides voting rights, which give shareholders a proportional vote in certain corporate decisions. Only a certain type of company called a corporation has stock; other types of companies such as sole proprietorships and limited partnerships do not issue stock.
Equities are generally riskier (higher variance of returns) than money market securities and bonds, but they provide higher rates of return over a long time period. Due to their risk and return profile, equities are categorized as a separate asset class commonly used in building investment portfolio mix. A number of types of equities include domestic stocks, developed market equities, emerging market equities, and Real Estate Investment Trusts.
Domestic Equities
Domestic equities are common stock held in publicly traded companies which operate primarily in the country where the investor resides. Owning the equity grants the holder the rights to any dividends or other distributions that the company makes. Equities are more risky than bonds since the bond holders have first call on the company’s assets if a bankruptcy and liquidation occurs. The equity holders can be left with nothing if a company liquidates.
Most people will subdivide the domestic equities market into more asset classes based on the size of the company (generally represented by the market capitalization) and the value/growth split. Value stocks are stocks that appear under-valued using some ratio such as price/earnings or book value to market cap. Growth stocks are companies with a higher than average rate of growth in their revenue, earnings or distributions. Thus, several combinations of size and value/growth behavior exist. There are several exchanges where these stocks trade and many indices which track the performance of equities in each particular asset class.
Developed Market Equities
These include equities of companies which operate in developed countries outside the investor’s home country; for the U.S. investor, they are primarily in Europe and several of the countries in the Pacific Rim. The economies of these countries are generally less volatile than developing countries. There are several indices for the developed markets. Morgan Stanley has one called the MSCI EAFE index.
Emerging Market Equities
This class includes stock in companies based in developing countries like Brazil, China and India. The economies of these countries can be very volatile and they generally don’t have as many investor protections through auditing and securities law as exist in developed markets.
REITs
REITs stand for Real Estate Investment Trusts. These are funds that make investments in real estate (both commercial and residential). They will generally generate higher levels of dividends since their investments will typically be paying them income from rents and leases. Since the distributions are higher, REITs behave somewhat like a hybrid between a traditional equity and a fixed income instrument. They will generally have higher expected returns and higher variance than most fixed income instruments.
Deflationary effect of harsh economic will push investors to take shelter in the relative safety of the bond market, Merrill Lynch said in a research report released on Friday, July 25, 2008. Investors should seek out safe yield in bonds as much as possible, whether in the Treasury market, the muni market or other high-quality fixed-income vehicles.Despite current concerns about global inflation, U.S. economic prospects are so grim that deflationary pressures will prevail as commodities and stocks sell off is likely to take place during a painful economic period of recession. Back to the U.S. consumer recession of 1973-75, collapsing earnings and price-earnings multiples triggered a 40 percent peak-to-trough decline in the S&P 500 index. U.S. households' bond exposure is not much more than 5 percent of their total assets, after the past two decades scrambles into stocks and then real estate. Consumers' rising inflation expectations as prices at the pump and the grocery story have surged in recent months have caused a bond market sell off. In the late 1980s and early 1990s, the level of bond exposure was between 7 percent and 8 percent of total assets. Using that past level as a benchmark for comparison purpose, the current figure would imply the potential for incremental demand in bond, most of which would go to Treasuries and other higher-quality bonds as riskier corporate debt feels the pinch of a tough economy.
A Relative Safety Investment For Rough Economy
From SmartInMoney
U.S. economic prospects are so grim as shown by recent leading economic indicators. Investors will take shelter in the relative safety of the bond market during a painful economic period. Weaken earnings during the rough economic time will cause price-earnings multiples of stocks collapse triggering stock market sell off.
Companies, municipalities, states, U.S. government, and foreign governments issue bonds, commonly referred to as fixed-income securities, to finance a variety of projects and activities.
Bonds are debt investments in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Interest on bonds is usually paid every six months (semi-annually). The annual return rate that the bond will pay is usually referred to as the yield of the bond. The entity returns the investor's principal at the maturity. Before maturity, the value of fixed-income investments can fluctuate in response to current interest and inflation rates.
Bonds are generally a less risky asset than equities (their variance of returns has been lower over time) but produce lower rates of return. Bonds are considered as a distinct asset class commonly used in investment portfolio construction because they have different risk and return characteristics from other asset classes. Some types of bonds include Treasury bonds, municipal bonds, corporate bonds, foreign bonds, asset backed securities, and mortgage backed securities.
Treasury Bonds (T-Bond) A marketable, fixed-interest debt security issued by U.S. government with a maturity of more than 10 years. Treasury bonds make interest payments semi-annually and the income that holders receive is only taxed at the federal level.
Municipal Bonds
Also known as a "muni", this is a debt security issued by a state, municipality or county to finance its capital expenditures. Municipal bonds are exempt from federal taxes and from most state and local taxes, especially if you live in the state in which the bond is issued.
Corporate Bonds
This is a debt security issued by a corporation and sold to investors. The backing for the bond is usually the payment ability of the company, which is typically money to be earned from future operations. In some cases, the company's physical assets may be used as collateral for bonds. Corporate bonds are considered higher risk than government bonds. As a result, interest rates are almost always higher, even for top-flight credit quality companies. Foreign Bonds
Foreign countries issue bonds in their domestic market in their home currency to fund the operations of the government. Foreign bonds are regulated by the domestic market authorities. The investor is taking on a couple of risks with foreign bonds. First, the bonds are dominated in the foreign country’s currency so there is some currency risk. Secondly, changes in interest rates for that country will impact bond prices. Asset-Backed Securities (ABS)
There are a host of fixed income securities whose payments are backed by assets. These securities generally will make periodic payments to the owner of the security. There is an asset (like loans, leases, credit card debt, a company's receivables, and royalties) which provides collateral in case there is a non-payment by the party which has entered into the payment arrangement. These securities are often offered by financial institutions which have created the security from a bunch of underlying assets which they have purchased. For investors, asset-backed securities are an alternative to investing in corporate debt.
Mortgage-Backed Securities (MBS)
A type of asset-backed security that is exclusively secured by a mortgage or collection of mortgages. These securities must also be grouped in one of the top two ratings as determined by an accredited credit rating agency, and usually pay periodic payments that are similar to coupon payments. Moreover, the mortgage must have originated from a regulated and authorized financial institution. MBS is also known as a "mortgage-related security" or a "mortgage pass through". When you invest in a mortgage-backed security you are essentially lending money to a home buyer or business. The bank that originated the mortgage acts as a middleman between the home buyer and the investment markets.
A Safer Investment Alternative In Volatile Bear Market
SmartInMoney U.S. stock markets are officially in bear market territory in this July 2008 with all three major indexes, the S&P 500, the Dow, and the Nasdaq, plunged from their peak in October 2007. When official bear market strikes, investors usually begin to dump stocks and seek refuge for their money to safer investment in money market instruments.
Cash Equivalents (Money Market Instruments) are investment securities that are short-term, have a low-risk, low-return profile and are highly liquid. Money market instruments are considered as a unique asset class commonly used in building an investment portfolio as they have distinct risk and return characteristics from other asset classes. Cash equivalents include U.S. government Treasury bills, bank certificates of deposit, bankers' acceptances, commercial paper and other money market instruments.
Treasury Bill (T-Bill)This short-term debt obligation is issued by the U.S. government and backed by its full faith and credit, with a maturity of less than one year, and exempt from state and local taxes. T-bills are sold in denominations of $1,000 and commonly have maturities of one month (four weeks), three months (13 weeks) or six months (26 weeks). T-bills are issued through a competitive bidding process at a discount from par, which means that rather than paying fixed interest payments like conventional bonds, the appreciation of the T-Bill provides the return to the holder.
Certificate of Deposit (CD)A short- or medium-term debt instrument offered by commercial banks. CDs bear a specified fixed interest rate and can be issued in any denomination. CDs are also known as "time deposits", because the account holder has agreed to keep the money in the account for a specified amount of time, anywhere from three months to six years. Money withdrew before maturity is subject to a penalty. CDs are FDIC-insured, low risk, low return investments.
Banker's Acceptance (BA)A short-term credit investment which is created by a non-financial firm and whose payment is guaranteed by a bank. BA is originated merely as an order by the drawer to the bank to pay a specified sum of money on a specified date to a named person or to the bearer of the draft. Upon acceptance by a bank, which occurs when an authorized bank employee stamps the draft "accepted" and signs it, the draft becomes a primary and unconditional liability of the bank. BA is often used in international trade (importing and exporting). Banker's acceptances are traded at a discount from face value on the secondary market.
Commercial Paper (CP)An unsecured, short-term debt instrument issued by a corporation or bank to finance its short-term credit needs, such as accounts receivable and inventory. Maturities typically range from 2 to 270 days. Commercial paper is available in a wide range of denominations, can be either discounted or interest-bearing. Companies with high credit ratings usually issue commercial paper, meaning that the investment is almost always relatively low risk. It does not need to be registered with the Securities and Exchange Commission (SEC) as long as it matures before nine months (270 days).
The Conference Board, a private research group, said Monday its index of leading economic indicators pointed to a further slide in activity in June 2008, extending an unexpected decline the previous month. The index, designed to predict the economy's performance over the next three to six months, fell by 0.1% in June to a reading of 101.7. The measure has fallen 2.1 % over the last 12 months.
“The domestic economy is showing no sign of strength," said Conference Board economist Ken Goldstein. "The deep financial crisis, a prolonged, intense slump in housing, high gasoline and food prices, weak consumer confidence and a weak dollar are all combining to produce unrelenting downward pressure on economic activity," he said.
Seven of the ten indicators that make up the leading index are known ahead of time: stock prices, jobless claims, building permits, consumer expectations, the yield curve, supplier delivery times and factory hours. The remaining three that are estimated by the Conference Board include new orders for consumer groups, bookings for capital equipment and money supply.
The dollar plunged to a new low against the euro, which peaked at $1.6038 in New York trading Tuesday, before recovering throughout the day in New York, as the Euro retreated to $1.5878. The euro’s (15-nation currency) new all-time high against the dollar surpassed its previous record of $1.6018 set on April 22.
The increase came as markets worried about the ongoing U.S. lending crisis and speculation that U.S. banks will report further losses this week, eroding confidence in the financial system of the world's largest economy.
Federal Reserve Chairman Ben Bernanke has become a bit more bearish on the U.S. economy than before. Bernanke told Congress the fragile economy is facing "numerous difficulties" despite the Fed's aggressive interest rate reductions, and sounded another warning that rising prices for energy and food are elevating inflation risks. Over the rest of this year, the economy was predicted to grow considerably below its trend rate, mostly because of continued weakness in housing markets, high energy prices and tight credit conditions. Yesterday regulators announced plans of a rescue for Freddie Mac and Fannie Mae, the two largest buyers of U.S. mortgages.
The Dollar’s fall against Euro means that everything is more expensive for Americans who are traveling in and buying from the Euro zone. On the other hand, the weak dollar means that American goods and services are cheaper for Europeans.
U.S. stocks tumbled on Wednesday, July 09, sending Standard & Poor's 500 Index into its first bear market territory since 2002. The slump was led by financial and technology stocks facing escalating fears about the impact of the slowing economy, the housing market slump and related credit crunch, and rocketing oil prices on company profits. The S&P 500 index joined the Dow Jones index, which last July 2 entered bear territory.
The three major indexes, the S&P 500, the Dow, and the Nasdaq, are now in the bear territory.
The S&P 500 index fell to 1,244.68 which was down 20.3% from its Oct. 10, 2007 high of 1,562. The Dow Jones Industrial Average fell to 11,147.44, off 21.3% from its Oct high. The Dow has fallen 21 percent from its October all-time high and closed in a bear market earlier on July 2.
The average decline of the Standard & Poor's 500 index in bear markets dating to 1940 is 34.1%. There are three worst bears since 1940 shows how bad things can get. In 2000-02, stocks ran into trouble when investors drove prices of tech stocks and most stocks to shaky levels relative to their earnings. When the tech bubble burst, it took the whole market down, causing a 49.1% drop over 31 months.
The 1987 bear lasted just three months, but most of the overall 33.5% decline occurred in one day, the Oct. 19, 1987, when the market crashed.
The 1973-74 bear market was caused by a host of factors common today. Inflation was out of control while oil prices skyrocketed, thanks to the Arab oil embargo. The economy slumped into recession. The stock downdraft lasted 21 months and knocked stocks down 48.2%.
The bear market designation is arbitrary, but it’s not pointless. Investors and traders have been trained to act differently in a bear market. For traders, it’s relatively easy to make money in a bull market buying and selling stocks. In reverse, it gets frustrating no matter what trading tactic you use in a bear market, because most stocks keep sliding downward. Once an official bear market hits, investors usually begin to dump everything.
Bear Market Officially Arrived As Oil Prices Hit New Record High 
The stock market headed into the second half of the year with disappointed news as the Dow Jones Industrial Average lost 166 points today and closed at 11,215.51. The Dow officially entered the bear market territories as it plunged more than 20% from the October 9, 2007 high, when the Dow hit its all-time record high close of 14,164.53. This marked the end of the last five-plus year bull market.
This is the first time since 2002 the Dow has closed below the threshold that signals a so-called bear market. A 20% decline is the traditional measure of a bear market. Since its establishment up in 1896 to 2007 the Dow was down on average 34.63% during the bear markets that lasted, on average 11.5 months.
The S&P 500 plunged to 1,261.53, extending its 2008 loss to 14%. The S&P 500 has dropped 19.4 percent from its October 2007 record, just shy of the 20% required for a bear market. In the average bear-scenario, the S&P 500 declines by 29%.
In the meantime, the Nasdaq Composite Index slid to 2,251.46, leaving it lost 21 percent from a nearly six year high on Oct. 31, 2007.Pulling down stocks today was a combination of another new record for crude oil price that climbed $143.57 a barrel and renewed fears about the financial sector. There are just a lot of very negative things happening in the moment. The record oil prices dim the outlook for corporate profits. Housing market slump and credit problems have squeezed home equity loans, which in turn limited consumer purchasing ability. While unemployment has been going up rapidly, skyrocketing gasoline prices and rising food prices have eaten into consumer discretionary spending. Consumers have lost their confidence as indicated by the consumer confidence index that sank to a 16-year low in June.This bear market offers new opportunity to buy stocks when most people want to sell. In the short term the market will be very volatile, but over the long term it is safe to say stocks will increase. As we can learn from the last bear market, which was back in 2001 after the dot-com meltdown, the Dow returned to a bull market in October of 2002.
The real growth in the U.S. economy accelerated in the second quarter as the real gross domestic product (GDP) increased at a 1.9 percent annual rate, the Bureau of Economic Analysis (BEA) at the Commerce Department, reported on Thursday, July 31, 2008. The rate was up from 0.9 percent in the first quarter but less than economists were looking for. The economy was boosted by $75 billion in tax-rebate checks from Washington and big drop in imports. The crumbling housing market and by a huge drop in inventories held back the economy growth. 
