Seeking Stability

One of the options being bandied about for the Obama IRA that we discussed yesterday is the stable-value fund. Aiming for ultra-safety, stable-value funds invest in bonds, but they go a step further than that. The funds also buy "wrap contracts" issued by insurance companies and banks to protect the underlying value of the bonds they hold. This brings down the funds' return, but it does make them pretty safe.

Not entirely safe, though. Last December, a stable-value fund operated by Invesco became the first-ever such fund to lose some of its value. The value of the bonds had dropped, and the insurance was with the investment bank Lehman Brothers, which had gone bankrupt the previous September. The combination caused this supposedly supersafe vehicle to lost 1.7 percent of its value.

So stable-value funds are still, relatively speaking, very safe investments, and appropriate vehicles for what the Obama IRAs are trying to do. But as we've learned, to our misfortune, over the past couple of years, nothing in the financial world is truly 100 percent safe.

The Obama Plan

There's a proposal kicking around Congress that's been called the Obama IRA: Companies with 10 or more emplyees but no retirement plan would be required to enroll their employees in an IRA that would automatically deduct money from employees' paychecks. The beginning default deduction would be 3 percent, although employees would be able to change that rate or opt out altogether.

There are good things and bad to be said about this scheme - it's great to get more people planning for their retirements, although it might prove burdensome to administer for a lot of small businesses - but there's one way in which it could prove very helpful. As you know, many businesses have cut back on their 401(k) contributions, or eliminated them altogether. At a point when our markets have been struggling, the last thing we need is to cut back on this crucial source of dollars for them.

It's not really been sorted out how these Obama IRAs would work, although the idea is they'd be mostly directed toward safe investments like money-market accounts. But there's also talk of putting this money into target-date funds, which are mutual funds whose assets automatically rebalance as you near the target date for which you plan to start withdrawing money, generally your retirement.

Having fresh funds flow automatically into mutual funds - and into the American stock markets - would be a real positive for the economy. Whether it's via this Obama plan or some other, we need to get to the point where people are regularly buying stocks again.

Instant Analysis

One result of our ability to get literally constant news updates from the Internet is that pundits feel the need to offer a reason for every little thing that happens in the markets. It used to be that the nightly newscast or the morning paper would assess the day's stock market news and offer a reason for why it happened: a favorable economic report, good news on consumer durables, that sort of thing.

Now we don't have time to wait for the end of the day. Now, as soon as the market moves, the financial media will have their rationales posted on the Internet. For instance, yesterday, the online version of the Wall Street Journal posted at 9:44 in the morning: "US Stocks Decline In Early Trading; Weighed By Oil Prices." The Associated Press followed by reporting: "The stock market is in retreat again as investors around the world grow pessimistic about the economic recovery. Following the lead of stock markets around the world, investors are taking their cues from the tumbling price of oil."

The Dow had dropped 52 points as trading opened, leading to those reports. But then what happened? Stocks rallied, and closed the day up 44 points.

Did oil prices suddenly rise, fueling the rally? Did investors decide they didn't care any more about oil prices? Or were there always more complex forces at work than simply the price of oil? My money is on that last one.

Halftime Stats

The July Fourth holiday weekend also marks the end of the first half of 2009. We are now six months into a year that has been very difficult for many of us, but not without its signs of optimism. Here's a scoreboard for the first half of the year:

Dow Jones Industrial Average Ended the first half of 2009 at 8447, down 6.5 percent from 9034 at the beginning of the year.

S&P 500 Ended the first half at 919.32, down 1.3 percent from 931.80

Nasdaq Ended the first half at 1835, up 12 percent from 1632

Unemployment Ended the first half at 9.5 percent, up from 8.5 percent

Inflation The latest figures we have show the consumer price index dropping at an annual rate of 1.2 percent, down from rising 0.03 percent at the beginning of the year.

A Thought for Independence Day

"The will of the people is the only legitimate foundation of any government, and to protect its free expression should be our first object."
- Thomas Jefferson

All of us here at Echelon Wealth Strategies wish you a happy, safe and patriotic Fourth of July.

Party Money

Americans spent $940 million on fireworks last year, according to the American Pyrotechnics Assocation. That's nearly a billion dollars! That's up roughly 50 percent from 2000, when we spent a mere $610 million on roman candles, sparklers and firecrackers. Fireworks appear to be a recession-proof industry.

We also spent $3.4 billion on hot dogs last year. On the Fourth of July alone, Americans will eat 150 million hot dogs, according to the National Hot Dog and Sausage Council.

The Fourth of July is also the biggest beer-selling holiday of the year. Last year, supermarkets sold 24 million cases of beer for Independence Day. Americans spend more than $90 billion on beer every year.

So have a great time this Fourth of July. You'll be helping the economy in the process.

The Strength of America, continued

We mentioned the other day that despite the downturn in the stock market, the New York Stock Exchange remains, by far, the most highly valued exchange in the world. But that doesn't begin to capture the size and strength of the American economy. With just 4.5 percent of the world’s population, the United States accounts for nearly a quarter of global GDP, and is roughly twice as large as the next largest economy, China. According to the International Monetary Fund, we produced more goods and services in 2007 than the next four largest economies combined.

Even if you look just at manufactured goods, the U.S. still leads the world. Despite the tremendous growth in China’s manufacturing output, the IMF reported that the U.S. was still the leader in 2006, the last year for which we have numbers, manufacturing 20.5 percent of the world’s goods. China was second with 13 percent. The U.S. produced more manufactured goods than Japan and Germany combined. Our manufacturing base may be losing some of its muscle, but it's still robust.

Unsurprisingly, America is also the largest exporter of goods and services in the world. We exported $1.84 trillion worth of goods and services in 2008, up 12 percent from 2007.

That's a powerful economy. In good times and bad, America continues to lead the world.