The Effects of a Downgrade

Even if we skirt the effects of a default as a result of the current fight over raising the debt ceiling, the United States still faces the possibility of having its credit rating lowered. Standard & Poor's has said that if the deficit cuts don't add up to a total of $4 trillion over ten years, the rating agency might drop our credit rating from its current AAA to an AA level.

That would put the nation's creditworthiness at a lower level than that of countries like Germany, Canada and Great Britain, and would force us to pay more on the amount of debt the Treasury Department issues. Our borrowing costs would go up - meaning that our future deficits would likely get worse before they were able to get better. There would be a ripple effect as well, since local governments often issue bonds linked to the U.S. government. If the feds lose their top rating, the costs of borrowing by other entities would rise, too.

Finally, many consumer lending rates, such as those for mortgages and car loans, would likely increase alongside the rates that Treasury bonds were forced to pay. In other words, even without a default, the debt battles could signal some ugly effects on our economy.

The Cost of Wealth

U.S. Trust came out this week with a survey of America's top-earning households, asking specifically about their attitudes toward their wealth. They talked to 450 people with at least $3 million in investable assets, and the results were surprising, instructive and even a little sad.

For instance, nearly half of the respondents indicated that there had been negative consequences to the accumulation of their wealth. Among those who said their wealth had come at a personal cost, the most common regrets were:

* Do not take enough time off (66 percent agreed with this)

* Too busy to spend time with family (49 percent)

* Define self-worth by wealth (31 percent)

* Mishandle personal relationships (26 percent)

* Physical health suffers (26 percent)

* Miss important milestones of family/friends (25 percent)

Advisor Confidence on the Rise

If you trust investment advisors such as myself, the economy might actually be in fairly good shape moving forward. That's according to the results of something called the Advisor Confidence Index, which surveys advisors about their feelings toward the markets and the economy. The ACI found that advisor confidence rose by over 2 percent in July.

That's not just an outcome of the modest recovery we've been in the midst of for the past two years. This particular gauge had been dropping earlier in the year, and July was the first month of 2011 to show an increase. Since January 1st, the advisors' level of confidence in the economy had fallen by 20 percent. In June alone, the gauge had fallen by 9 percent.

The current reading of this particular survey takes us up to Monday. We'll have to wait and see how advisors' confidence fares once the bruising fight over the debt ceiling has ended.

Overcoming the European Woes

While everyone is focused on the debt ceiling fight here in America, it's worth noting that debt issues in Europe have already had a deleterious effect on our economy. Companies making up the Standard & Poor's 500 index derived 23 percent of their revenues from Europe as recently as 2008; that number is now down to 21 percent. S&P 500 companies doing business in Europe saw a 10 percent drop in sales over that period.

The good news is, some American businesses have been making up the difference elsewhere. Coca-Cola, for instance, has seen European revenues fall from 17 percent of its overall total in 2008 to 14 percent now. But because its second-quarter revenues were up 15 percent in Eurasia and Africa and 13 percent in Latin America, Coke's revenues would be up 14 percent on the year even if it didn't sell a drop in Europe.

IPOs Heading Upward

The second quarter of 2011 turned out to be a solid one for initial public offerings, with 46 companies going public. That's up 24 percent from a year earlier. And with 18 more IPOs scheduled for July, this month could end up as the second busiest July - normally a quiet time for initial offerings - in the past decade.

It wasn't so long ago that the entire IPO market appeared to be dead in the water. There were 11 IPOs in the entire third quarter of 2008. That dropped to three in the fourth quarter of 2008, and two in the first quarter of 2009. In that first quarter of '09, there were only 50 IPOs in the entire world.

Our economy still has its share of troubles. But the fact that people are once again willing to try to build a business and sell its ownership to the public is an encouraging sign.

Credit Card Concerns

It's now been about two years since the new credit-card reform laws took effect, and if the recent surveys are any indication, people still aren't very happy with their card issuers. According to research conducted by the Associated Press and the market-research firm GfK, nearly half of all credit-card holders still feel that their bank is charging them rates that are either very or somewhat unfair. Only 23 percent felt that their rates were fair.

The fees and penalties banks impose on their cardholders got a slightly more favorable response, but only slightly. The same percentage, 23 percent, felt that their fees were fair, but 42 percent found them somewhat or very unfair.

Still, people aren't so upset that they want to find new credit cards to use. The same survey found that only 8 percent describe themselves as extremely or very likely to change credit cards in order to get a better deal.

Corporate Profits: Still Strong

We're entering the season of corporate profit reporting, and it's shaping up to be a doozy. Wall Street analysts are predicting an all-time high for profits, surpassing the earlier record set in the second quarter of 2007. Profit margins have risen to an average of 9 percent, which is also the highest they've been since 2007.

According to a survey by CNNMoney, economists expect earnings for the S&P 500 to be up 13 percent over the course of 2011. That's a far cry from last year, when earnings rose a whopping 47 percent, but that was in comparison to the recession-hindered 2009 figures. Going up 13 percent from an already-strong figure is impressive indeed.

Since the recession officially ended in June 2009, corporate profits have risen an eye-popping 90 percent. That's a remarkable couple of years.

The Cost of Default

As the debt-ceiling negotiations near their endgame - the Treasury Department expects to hit the ceiling on August 2 - it's worth noting that we've been through this dance once before in our nation's history. Back in 1979, we defaulted on our national debt for a period of two weeks, when Congress raised the debt ceiling literally hours before we would have exceeded it. Technical issues affecting Treasury's relatively primitive computers caused it to miss payments on $120 million worth of bonds, putting us technically in deafult.

What happened then? The incident was little noticed, but academic research subsequently showed that the cost of issuing debt rose by about 60 basis points, or a little over half a percent, as a result of that little default. And the 60-point rise appeared to be permanent.

Nowadays, foreign bondholders own roughly 46 percent of all Treasury securities. It's a reasonable guess that, should the United States default on its debt again, those bondholders would end up demanding that 0.6 percent premium, if not more.

Do Away With the Debt Ceiling?

Moody's has come up with a solution to the debt-ceiling imbroglio that has been plaguing Washington, D.C.: Just do away with the idea altogether. The rating agency points out that the United States is one of the few countries where the legislature sets a ceiling on government debt to being with, and argues that the entire concept is outdated. Moody's asserts that the it would lessen the risk it assigns to government debt without the debt ceiling getting in the way.

This process used to be much more cumbersome than what we have now. Congress first established a firm debt limit in 1917 to help finance World War I. Prior to that, every time the Treasury Department wanted to sell bonds to raise money, it had to ask Congress for approval. The debt ceiling was intended to streamline the process and give Treasury the leeway it needed to issue debt without it getting out of control.

Congress has raised that limit a grand total of 102 times since 1917. Just since 2001, the debt ceiling has been raised ten different times. Is it time to stop moving those goalposts?

Cash on the Sidelines

We've mentioned before that one thing holding the economy back from full recovery is the fact that many major American corporations are sitting on a lot of cash these days. In total, the S&P 500 has around $800 billion in cash sitting on the sidelines. Cash and cash equivalents make up about 7.4 percent of the S&P 500's total market capitalization.

Maybe the greatest example of this trend is Apple. At the end of its last reporting quarter, Apple had around $66 billion in cash or securities on its hands. It's been adding to that pile furiously lately: the total was under $20 billion as recently as 2008. Apple's cash hoard is worth more than the combined market caps of its rivals Nokia, Research in Motion, and Motorola Mobility. According to one estimate, Apple could fund all its operations till 2018 even if it had no revenue whatsoever.

This is, in a sense, good news for our economy. If these corporations ever decide they have a good reason to spend all that money, we'll see a tremendous boost to the economy.

America, Hanging In There

For people reading the Treasury-bond tea leaves, there are some signals out there that seem to indicate the looming crisis of our debt ceiling and the possibility of default will be short-lived. The Treasury Department's auction of 30-year bonds on Thursday provoked higher-than-average demand, for the third straight sale. It also shows that the market for Treasury bonds is still strong after the end of the Fed's quantitative easing program.

There was some concern, with the debt ceiling issue still up in the air, that investors would be shying away from the United States' long-term debt. Those concerns only increased when Moody's announced it would put the nation's AAA rating under review for a downgrade. But yesterday's auction stilled those fears for the moment, and Moody's has now said it doesn't see a downgrade happening.

Part of this has less to do with America's troubles and more to do with troubles that are still growing in Europe. Greece's credit rating actually was cut yesterday, all the way down to CCC. For all the problems this nation is facing, we're still a lot better off than the rest of the world.

Hitting the Ceiling

The big story in Washington these days is the negotiation over the federal debt ceiling. Our national debt currently stands at just over $14 trillion, which puts it at the legal limit that was established by Congress in February 2010. Sometime very early next month, the debt is projected to exceed that limit, for the first time in American history. At that point, we can either raise the debt ceiling, or run the risk of default.

It’s important to understand what exceeding the debt ceiling would not mean. It wouldn’t mean a government shutdown, or that the government had to stop spending money. After all, revenues would still come in via taxes, so there would be new money for the feds to spend. It would not even mean an immediate default on our debt. One way to avoid that is if the government prioritized its spending. There wouldn’t be enough assets for it to pay all its obligations, but it could tell, say, defense contractors that they wouldn’t be receiving their payments until the crisis was resolved.

What would trigger the default is if the government stopped paying interest on the debt. That has to be given first priority, which is why the cuts to actual spending would be so draconian. To stay under the current debt ceiling, government spending would need to drop by around 40 percent. That's why the stakes have been so high, for both sides.

A Football Star's Blues

If you've been disappointed with your investments lately, just be glad you're not NFL wide receiver Buster Davis. Like a lot of professional athletes, Davis was preyed on by people claiming to be investment advisors - but his story turned out even worse than most. Davis was confronted by a group called Capital Management Group Wealth Advisors back in 2007, when he was fresh out of college and was a first-round pick of the San Diego Chargers. Just 22 years old, Davis was persuaded to invest in a scheme that was going to build airplane hangars. In Idaho.

It's not clear how prosperous the hangar business is in Idaho in the best of times, but given that we were just entering a recession at the time, Davis' investment was wiped out. He sued the Capital Management partners back in March 2010, and they reached a settlement in February of this year.

If the story ended there, it wouldn't be so bad, except that the investment advisors didn't even pay out the agreed-upon settlement. The latest development is that this week, Buster Davis had a judge issue a warrant for the arrest of his financial advisor - in hopes of getting at least some of his bad investment back. Good luck, Buster.

Small Firms and Job Creation

Following on the heels of last week's disappointing jobs report, there's a new study out from the Kauffman Foundation looking at longer-term trends in job creation, and why it's been over a decade since we've had really robust job growth in this nation. The problem, according to the report, is that newly emergent small businesses, which have been such a potent job creator throughout recent history, are no longer creating jobs like they used to.

The report found that young companies have been "starting smaller" for the last decade or so. That means that they've hired fewer workers upon entering into business, and have been slower to add jobs even as the business begins to mature.

And those newer, smaller firms are crucial to our economy. More than 60 percent of all jobs are created by companies that are five years old or less. More than half the jobs are created by companies with fewer than 50 employees. We need that job-creation engine to be strong if we're to fully emerge into recovery.

Watching the TIPS Spread

For a while, earlier in the year, between the Federal Reserve flooding the country with money through its QE2 program and the price of gasoline spiking upward, there was widespread fear that we were in for a bout of uncontrolled inflation. The best long-term measure for where the smart money think inflation is headed is the spread between what Treasury bonds are returning and what the Treasury's inflation-protected bonds, or TIPS, are returning. That figure peaked this year in April at 2.67 percent - meaning that investors expected inflation to average 2.67 percent over the next ten years.

As QE2 has come to a close, and as gas prices have drifted back downward, inflation expectations moderated. The TIPS spread dropped all the way to 2.14 percent in May. But it has started creeping back up lately, and by the end of June it was trading at around 2.4 percent.

Except for a plunge in early 2009, the TIPS spread has been fairly consistent at around 2.5 percent since 2004. It looks like it's going to stay in that range for a while.

Troubling News on the Jobs Front

This morning's unemployment report was frustratingly - and surprisingly - disappointing. After the ADP payroll report earlier in the week indicated that the private sector had added 157,000 jobs in June, the official report from the Labor department showed that the economy added a feeble 18,000 jobs for the month: 57,000 added to the private sector, and 39,000 cut from the public sector. That's the lowest figure we've seen in nine months.

And that wasn't the end of the bad news. The government also revised its figures for April and May after determining that those months saw 44,000 fewer jobs created than we had previously thought.

The total number of people unemployed is now up to a staggering 14.1 million, up from the 13.9 million reported as unemployed in May. Overall, the unemployment rate is now officially 9.2 percent - the highest it's been since last December.

A Team Effort

Have you talked to your wife - or your husband - lately about your retirement plans? No? If so, you're not alone, according to a new survey from Fidelity. Nearly two-thirds of the married couples surveyed couldn't even agree on the age at which they'd retire.

Only 41 percent of all couples have handled their investment decisions for retirement as a team. Just 17 percent say that either spouse would be able to take care of their financial decisions, if need be. And a whopping 73 percent of all married couples can't even agree on whether they have a detailed, completed retirement plan in the first place.

If you're unsure of what your retirement might entail, or what your spouse thinks it will entail, it's never too early to sit down and have that conversation. Better yet, sit down with your wealth manager and discuss what your retirement will be like - and what you want it to be like.

Strengthening Credit

One thing you have to say about tough economic times: They sure force people to act more responsibly with their money. We've noted several times that credit card usage dropped dramatically during the economic downturn. That can be shown by looking at the ratio of consumer-debt payment to income, which is the lowest it's been since 1994.

As a result, consumer credit scores are now the best they've been in four years. According to the credit-reporting agency Equifax, the average American credit score now sits at 696 out of a possible 850.

And maybe even better, people are starting to look for loans again. Consumer lending grew in the first quarter of 2011 - the first time that's happened since 2005. Extra money circulating through the economy will certainly help this recovery along.

At the Halfway Point

The Fourth of July holiday not only provides a break for the markets but marks the halfway point of the year. So it makes sense to look back now at what's happened so far:

* The Dow Jones Industrial Average is up 7.8 percent on the year. Its low point was on March 16, at 11,613, and peaked on the last day of April, at 12,810. It's now at 12,582.

* The S&P 500 isn't quite as strong, gaining 5.3 percent on the year. The Nasdaq is slightly under that, up 5.03 percent on the year. Both those markets' low and high points came on the same days as for the Dow.

* Treasury bond yields, by contrast, spent most of the first half of 2011 dropping. The yield for the 10-year bond peaked on February 8th, at 3.725 percent, and bottomed out on June 24th, at 2.87 percent, before rallying to its current level of just under 3.2 percent. All told, it's dropped 4.45 percent on the year.

Thoughts for Independence Day

Those who won our independence believed liberty to be the secret of happiness and courage to be the secret of liberty. ~Louis D. Brandeis

If our country is worth dying for in time of war let us resolve that it is truly worth living for in time of peace. ~Hamilton Fish

I believe in America because we have great dreams - and because we have the opportunity to make those dreams come true. ~Wendell L. Wilkie

Consumer Confidence and Gas Prices

Some bright news for these United States of America as we head into the holiday weekend: Consumer confidence continues to trend stronger. Bloomberg's Consumer Comfort Index is now at the highest level it's been in ten weeks.

What's been fueling this trend - pun intended - is gas prices. Nationally, gas prices are down 11 percent in 2011. Here in New Jersey, the average price of a gallon of gasoline has dropped from $3.88 at its peak on May 11 to $3.54 right now.

The consumer confidence numbers move because of a lot of different factors, but there's one thing that always takes precedence: When gas prices go up, consumer confidence goes down. When gas prices go down, consumer confidence goes up. With a long Fourth of July weekend coming up, and many of us getting ready to go on driving trips, it's nice to have both those trends moving in the right direction.