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STA Weekly Report – Record Market Highs and Record Debt

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INSIDE THIS EDITION:
Record Market Highs and Record Debt
The Potential Economic Impacts of an Active Hurricane Season
Were you Hacked?  Find out if the Equifax Data Breach Affects You!
Weekly Technical Comment
401k Plan Manager



Record Market Highs and Record Debt

The S&P 500 hit a fresh record and the Dow Jones Industrial Average closed above 22000 for the first time in nearly a month this week, as investors’ fears about North Korea and Hurricane Irma eased.

Some analysts had expected North Korea to conduct a weapons test on Saturday, coinciding with the country’s founding day, as it did last year to mark the celebration. The absence of news from Pyongyang supported stocks, as well as, the dollar.

Meanwhile, concerns about Hurricane Irma’s impact on the U.S. economy decreased. A reduction in the storm’s strength and a shift in its expected course—there was no direct hit on Miami—meant insured damage estimates were likely to be less than originally anticipated.

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Market Internals

Previously, we have discussed concerns about the internals of the market rally. We noted negatives including more stocks declining than advancing and more stocks setting new lows than new highs over the last several weeks. There is another sign of deteriorating internals: stocks trading above their 50-Day Moving Average.

When the majority of the market is advancing one expects a high number of stocks to be above what they have averaged over the last 50 days. Take, for example, what happened at the end of July. The S&P 500, at that point, was up (on a total-return basis) 11.6%. How about individual stocks, were they following the index’s lead? Yes, they were. We found 63% of stocks above their 50-Day moving average. Now? Only 53% of the S&P stocks are above their 50-Day moving average.

Another sign of concern comes from insiders, namely the actions the companies themselves are taking. Corporate stock buybacks of shares have declined by a dramatic 20% compared to a year ago. Our own research dovetails with this. We find, of the 3,000 largest common stocks, the majority are now offering new shares to the public (i.e. the smart money is selling) rather than buying back their shares.

The good news is there is a logic to the market’s behavior, and that at the moment, nothing seems likely to alter its course. The bad news is things can turn quickly, and when they do, the decline could be severe.

Record Debt

It’s now official. The federal debt officially surpassed $20 trillion for the first time on Friday, as the debt subject to the legal limit set by Congress jumped $317,645,000,000 in one day–following President Donald Trump’s signing of a spending-and-debt-limit deal that will fund the government through Dec. 8.

This is pretty brutal for Uncle Sam. The U.S. government hasn’t run a budget surplus in two decades; they depend on debt to keep everything running.

And without the ability to ‘officially’ borrow money, they’ve basically spent the last six months ‘unofficially’ borrowing money by plundering federal pension funds and resorting to what the Treasury Department itself calls “extraordinary measures” to keep the government running.

Late last week the debt ceiling crisis came to a temporary armistice as the government agreed once again to temporarily suspend the debt limit.

Overnight, the national debt soared hundreds of billions of dollars as months of ‘unofficial’ borrowing made its way on to the official books.

The national debt is now $20.1 trillion. That’s larger than the size of the entire US economy.

You’d think this would be front page news with warnings being shouted from the rooftops of America. Yet curiously the story has scarcely been covered.  Today’s front page of the New York Times tells us about Hurricane Irma, North Korea, and alcoholism in Iran.

Even the Wall Street Journal’s front page has zero mention of this story.

In fairness, the number itself is irrelevant. $20 trillion is merely a big, round, psychologically significant number… but in reality no more important than $19.999 trillion.

The real story isn’t the number itself or the size of the debt itself. It’s the trend. And it’s not good.

Year after year after year, the US government spends far more money than it collects in tax revenue.

According to the Treasury Department’s own figures, the government’s budget deficit for the first 10 months of this fiscal year (i.e. October 2016 through July 2017) was $566 billion. That’s larger than the entire GDP of Argentina. Since the government has to borrow the difference, all of this overspending ultimately translates into a higher national debt.

Make no mistake, debt is an absolute killer.

Former US Treasury Secretary Larry Summers used to quip, “How long can the world’s biggest borrower remain the world’s biggest power?”

It’s hard to project strength around the world when you constantly have to borrow money from the Chinese… or have your central bank conjure paper money out of thin air.  And yet tackling the debt has become nearly an impossibility.

Just look at the top four line items in the US government’s budget: Social Security, Medicare, Military, and, sadly, interest on the debt. Those four line items alone account for nearly NINETY PERCENT of all US government spending. Cutting Social Security or Medicare entitlements is political suicide.

Not top mention, both of those programs are actually EXPANDING as 10,000 Baby Boomers join the ranks of Social Security recipients every single day. Then there’s military spending, which hardly seems likely to fall significantly in an age of constant threats and warfare. The current White House proposal, in fact, is a 10% increase in military spending for the next fiscal year.

There seems almost no chance they’re going to be able to reduce the debt by cutting spending. But perhaps it’s possible they can slash the national debt by growing tax revenue? Possible. But unlikely. Since the end of World War II, the US governments’ overall tax revenue has been VERY steady at roughly 17% of GDP.

You could think of this as the federal government’s ‘slice’ of the economic pie. Tax rates go up and down. Presidents come and go. But the government’s slice of the pie almost always remains the same 17% of GDP, with very small variations. With data this strong, it seems rather obvious that the solution is to allow the economy to grow unrestrained.

If the economy grows rapidly, tax revenue will increase. And the national debt, at least as a percentage of GDP, will start to fall. Here’s the problem: the national debt is growing MUCH faster than the US economy. In Fiscal Year 2016, for example, the debt grew by 7.84%. Yet even when including the ‘benefits’ of inflation, the US economy only grew by 2.4% over the same period. In other words, the debt is growing over THREE TIMES FASTER than the economy. This is the opposite of what needs to be happening.

What’s even more disturbing is that this pedestrian economic growth is happening at a time of record low interest rates. Economists tell us that low interest rates are supposed to jumpstart GDP growth. But that’s not happening.

If GDP growth is this low now, what will happen if the Federal Reserve continues to raise rates? (And by the way, raising interest rates also has the side effect of increasing the government’s interest expense, essentially accelerating the debt problem.)

It’s great to be optimistic and hope for the best. But this problem isn’t going away, and it would be ludicrous to continue believing this massive debt is consequence-free.

There’s no reason to panic or be alarmist.

But it’s clearly time for rational people to consider this obvious data… and start thinking about a Plan B.

The Potential Economic Impacts of an Active Hurricane Season

After dumping an estimated 27 trillion gallons of water on Texas and Louisiana, Hurricane Harvey brought massive flooding to large areas of Houston, Beaumont and other areas of Texas, forced tens of thousands of people to evacuate their homes, and shut down oil rigs and refineries along the Gulf coast. As a matter of fact, Harvey set the U.S. record for most rainfall produced by a tropical storm over last 50 years. While the full economic impact will not be available for some time, Harvey is sure to be one of the most damaging natural disasters in U.S. history.

[caption id="attachment_5963" align="aligncenter" width="300"] *Click to Enlarge[/caption]

Insurance Companies and Disaster Budgets Are under Stress Test

According to risk-modeling company RMS, Harvey alone may have caused between $70 billion and $90 billion in losses from wind, storm surge, and flooding, most of it in the Houston metropolitan area. It is predicted that Hurricane Irma will add an additional $50 billion in losses. These projected damages would put Hurricanes Harvey and Irma among the costliest catastrophes since the 1970s. With another two months to go in hurricane season, more storms that threaten the U.S. could develop, adding strain to insurance company balance sheets and government disaster budgets.

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Gasoline Prices Surge and Consumers Feel the Pain

Hurricane Harvey brought heavy rains and floods along the U.S. Gulf Coast, which shut pipelines and took 4.15 million barrels a day, or 22 percent, of U.S. refining capacity offline. Around 10% of manned oil platforms in the Gulf were evacuated, according to the Bureau of Safety and Environmental Enforcement.

[caption id="attachment_5964" align="aligncenter" width="300"] *Click to Enlarge[/caption]

Consumers felt the pain immediatedly by witnessing surging gasoline price at the pump. From August 27th to September 8th, the average U.S. price for regular gasoline jumped $0.30 per gallon, or 12.85%. On August 31st alone, the gasoline price rose 7 cents, the steepest single-day increase since April 5, 2007, according to data from the American Automobile Association (AAA). However, the US market was adequatedly supplied, with tankers on their way to bring in gasoline from Europe. AAA forecasts that gasoline prices will quickly fall back by the end of the month.

[caption id="attachment_5966" align="aligncenter" width="300"] *Click to Enlarge[/caption]

U.S. Jobless Claims Soar by Most Since 2012 on Hurricane Harvey

U.S. jobless claims surged last week by the most since November 2012. In 2012, it was another Hurricane, superstorm Sandy, that caused the spike in jobless claims. With tens of thousands of Texans now displaced by Hurricane Harvey, initial jobless claims, a proxy for layoffs across the U.S., rose by 62,000 to a seasonally adjusted 298,000 in the week ended Sept. 2, the Labor Department reported Thursday. However, we expect the spike in applications to collect jobless benefits to be short-lived, just like it was following Hurricane’s Katrina, Irene, and Sandy.

[caption id="attachment_5965" align="aligncenter" width="300"] *Click to Enlarge[/caption]

Natural disasters impact on the broad US Economy

Can hurricanes like Harvey affect the broader US Economy? To get a sense, economists surveyed by The Wall Street Journal expect GDP growth to fall by 0.3% in the third quarter, followed by a negligible effect in the fourth quarter and a 0.2% boost in the first quarter of 2018. Similarly, Harvey is expected to reduce the pace of job gains by 27,000 jobs a month in the third quarter, have little impact in the fourth quarter and then lead to a boost of 13,000 jobs in the first quarter of 2018. However, the net impact of a natural disaster on the economy typically ends up as a wash. Initially, GDP tends to get hit as businesses are forced to close and people cannot go to work and shop. But then as people repair, rebuild, and replace damaged homes, cars, equipment and infrastructure, the economy can get a boost that offsets the drag.

[caption id="attachment_5959" align="aligncenter" width="300"] *Click to Enlarge[/caption]

As such, Hurricane Harvey and Irma will distort U.S. economic measures in the months ahead, making it difficult for the Federal Reserve to gauge the health of U.S. economy. The Fed has planned to raise interest rates for the third time this year at its December meeting. However, it may be difficult to do that as we are likely to see a weak third quarter GDP data. Although we are likely to see rising inflation readings as supplies shrink and demand rises in the aftermath of two major hurricanes, the Fed won’t have much certainty on whether bumps to inflation are short-lived or not. This lack of clarity in the outlook could be enough to keep the Fed from hiking again later this year and increases our need to focus on diversification.

While it used to be that plain vanilla diversification was enough to navigate markets, that is no longer the case. Markets are simply too complex and move too quickly for simple diversification to do the heavy lifting. Instead, we use tools that help us diversify across asset classes and strategies while also helping us understand which factors (interest rates, oil prices, foreign currency among others) portfolios are exposed to and how portfolios may react to changes in those underlying factors.

Technical Commentary

Stock Indexes Remain Above 50-Day Lines

Stocks are starting the week on a strong note. Chart 1 shows the Dow Jones Industrial SPDR (DIA) remaining above its 50-day average. Chart 2 shows the S&P 500 SPDR (SPY) bouncing off its 50-day line as well. Chart 3 shows the PowerShares QQQ ETF remaining well above that support line. A three-month extension of the U.S. debt ceiling appears to have boosted stocks. At the same time, bond yields jumped as bond prices sold off.

[caption id="attachment_5962" align="aligncenter" width="300"] *Click to Enlarge[/caption] [caption id="attachment_5968" align="aligncenter" width="300"] *Click to Enlarge[/caption] [caption id="attachment_5967" align="aligncenter" width="300"] *Click to Enlarge[/caption]

A rebound in the price of oil has made energy the day’s strongest sector with the Energy SPDR (XLE) exceeding its 50-day line for the first time in a month. Foreign stock ETFs are higher.

[caption id="attachment_5970" align="aligncenter" width="300"] *Click to Enlarge[/caption]

Weekly Snapshot of Global Asset Class Performance

 

[caption id="attachment_5969" align="aligncenter" width="300"] *Click to Enlarge[/caption]

If you have any questions, please feel free to email me at luke@stawealth.com.

Luke

STA Investment Committee

Luke Patterson, CEO & Chief Investment Officer
Mike Smith, President
Andrei Costas, Senior Investment Analyst (Equity Strategies)
Nan Lu, Senior Investment Analyst (Fixed Income Strategies)

Were you Hacked?  Find out if the Equifax Data Breach Affects You!

If you haven’t heard, on September 7th, Equifax, Inc. announced yesterday that 143 million of its customers were affected by a hack that occurred between mid-May and July.

If you are not aware, Equifax is one of the three main consumer credit reporting agencies that collect your information and provide a credit score. Many financial institutions use this credit score in determining your credit risk. The other agencies are Transunion and Experian.

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Here is an article from Investopedia that that describes more about the breach. This past Friday on the STA Money Hour, I spoke to how the breach may affect you and some of the action steps for you to contemplate.

Equifax has known about the attack since July 29, but waited over a month to alert the public. As many as 209,000 customers’ credit card numbers were exposed as a result of the hack, and dispute documents related to 182,000 U.S. consumers – which include personal information – were compromised. Some British and Canadian consumers may also be affected by the breach, according to the company.
t is a good idea to know your options in case you are impacted and had your data compromised. If you want to check, click to the Equifax article below:
https://www.equifaxsecurity2017.com/
https://www.equifaxsecurity2017.com/potential-impact/
What kids of information was stolen/hacked (they got a lot)?
1. Credit card numbers
2. Social Security Numbers
3. Dates of Birth
4. Driver’s License Information

What are some of the other things you can do?
1. Consider taking Equifax up on their offer for free credit monitoring…they discuss it in their article above. These will have the service check for any opened credit ad send you alerts. However, these alerts will only notify you once someone has opened credit or accessed your information. Note: if you accept their “free” credit monitoring you give up the option of participating in a class action lawsuit as part of the acceptance.

2. Contact your financial services firms (especially credit cards) and health providers (as they can also “steal” your healthcare identity to access your health insurance)

3. Check your credit report and request a Fraud Alert from all three credit reporting agencies as this will make it much harder for you or anyone to create credit under your name with stolen information.

4. If you know that your data has been compromised, you can consider a Security Freeze (there may be a cost for this of around $10), but this will freeze your or anyone’s ability to open credit using your information (including you). This higher level of security. Once the freeze in in affect, no one can access your credit report until you release the freeze. You can also for a small fee ask for a “thaw” or a short-term removal that will allow access to your credit report with a confidential PIN (that you will receive at the time the freeze is put in force. You would also need to do this with all three reporting agencies.

5. Change passwords across all accounts and make them hard to guess (complex passwords are good).

6. Check your financial, bank and credit card statements for unusual activity or unfamiliar charges or activity.

7. Bring in the experts: Use a credit monitoring service like that offered by Experian. There are others that offer credit monitoring services and alerts (as discussed in #1 above) that include your credit card provider, your bank, the other reporting agencies or even third parties like LifeLock that advertises quite a bit on TV and Radio. However, do your homework before using an unfamiliar service.

If you have any questions please feel free to email me at Scott@stawealth.com

Scott

STA Financial Planning Department
Scott Bishop, Executive VP of Financial Planning, Partner
Patrick Fleming, Senior Director of Wealth Managment
Elena Sharma, Financial Planner
Stephen Kirby, Financial Planning

 


Disclaimer: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by STA Wealth Management, LLC), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from STA Wealth Management, LLC. Please remember to contact STA Wealth Management, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. STA Wealth Management, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the STA Wealth Management, LLC’s current written disclosure statement discussing our advisory services and fees continues to remain available upon request.

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