Marc Aarons @ Money Managers Inc. Presents:
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QUOTE OF THE QUARTER
“Life is what happens to you while you’re busy making other plans.”
QUARTERLY TIP
Remember that recent payment activity accounts for the bulk of most credit scores. An inactive card may actually result in a long-run negative effect on your score.
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A review of 2Q 2012 THE QUARTER IN BRIEF
DOMESTIC ECONOMIC HEALTH
Consumers were spending less and apparently worrying more by the quarter’s end. The price of gas had more than a little to do with that: average retail gas prices hit a peak of $3.94 in April, ending the quarter 12.3% lower at $3.45. Personal spending was flat in May for the first time in 6 months after a (revised) 0.1% gain in April. Consumer sentiment (as measured by the University of Michigan) hit a six-month low at the end of the quarter (73.2) while the Conference Board’s index declined in April, May and June, ending the quarter at 62.0. Producer prices dropped a full percent in May after a 0.2% retreat in April; by May, the annualized gain in the PPI was just 0.7%.3,4,5,6
The Institute for Supply Management’s much-watched PMI tracked a slowdown in American manufacturing. April’s short-term peak of 54.8 gave way to May and June readings of 53.5 and 49.7, the first contraction signal in 35 months. The Institute’s non-manufacturing index came in at 53.5 in April and 53.7 in May. Hard goods orders improved 1.3% in May after two months of declines, and factory orders were up 0.7% in May after slipping the same amount in April. New cars were being bought left and right, with GM’s sales up 16% from a year ago, Nissan’s up 28%, Ford’s up 7% and Chrysler’s car sales up 42%.7,8,9,10
Facebook’s IPO excited the market in May, but the NASDAQ fumbled the debut and shares did not soar. The Fed’s major move during the quarter was a minor one – an extension of its Operation Twist bond-buying program through the end of the year. The most controversial aspect of President Obama’s healthcare reforms passed a Supreme Court test: in a 5-4 vote, the Court decided that the oncoming requirement for individual health insurance was constitutional, characterizing it not as a legal mandate but as a tax. The Supreme Court nixed the Affordable Care Act’s expansion of Medicaid, saying that the federal government cannot threaten states with losing 100% of Medicaid funds if they do not expand the program.11,12
GLOBAL ECONOMIC HEALTH
Other eurozone economic problems worsened in the quarter. S&P cut Spain’s credit rating from A to BBB+ and downgraded 11 Spanish banks, which cued a rescue. The EU jobless rate hit a Euro-era high of 11.1% in June and the Markit PMI index sat at 45.1 in both May and June (at that was better than the mid-30s, which is where it was in Q1 2009).The EU came up with a couple of bold ideas in June: it crafted a plan to recapitalize troubled banks with liquidity injections from the eurozone rescue fund (without adding to existing sovereign debt), and it proposed a single eurozone banking regulator.14,15,16,17,18
With dips in consumer demand around the world, key manufacturing economies saw declining PMIs. By the end of the quarter, the economies of China, Japan, Germany, Great Britain, Italy, France, South Korea and Taiwan all shared something in common: manufacturing sector contraction. India’s PMI stayed above 50 in June, but China’s HSBC PMI was at 48.2.19,20
WORLD MARKETS
COMMODITIES MARKETS
REAL ESTATE
Back on March 29, Freddie Mac had average mortgage interest rates as follows: 30-year FRMs, 3.99%; 15-year FRMs, 3.23%; 5/1-year ARMs, 2.90%; 1-year ARMs, 2.78%. On June 29, the averages were lower across the board: 30-year FRMs, 3.66%; 15-year FRMs, 2.94%; 5/1-year ARMs, 2.79%; 1-year ARMs, 2.74%.31
LOOKING BACK…LOOKING FORWARD
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends.
This third quarter may be a trying one for investors worldwide. Will we see Greece make a managed exit from the euro? Will the widespread recession in Europe deflate demand, translating to a summer and fall of weakness in global manufacturing and perhaps earnings? There could be a downside to any upside: if positive news rolls in (i.e., the EU manages to exert real control over its debt crisis and U.S. economic indicators provide pleasant surprises), the Fed might be convinced to abandon any notions of quantitative easing. With the 6-month extension of Operation Twist, the Fed has signaled a preference to stand back from the market – a preference that may be reaffirmed as a result of its upcoming policy meetings. It may be that the third quarter presents some jarring potholes for the markets, with investors faced with the challenge of hanging on until the promise of the fall arrives.
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