October 3, 2013

Greetings! As the quarter ends the equity investment market has been kind to us. We are now almost five years from the recession. For those of us who did not sell at the bottom we have been rewarded with a five year return in the broad stock market of 7.73% annualized return. I know of few places where your capital could have grown at that rate without a lot of hands on work. The year to date number is a whopping 16.73%. Bill Patton in our office often says to buy good companies and add time. These returns reinforce my belief that equities are a very good place to store and increase your capital. Too many people miss interpret volatility for risk. It would be like digging up your front yard to install a new sidewalk and devaluing the house because of the current mess in your front yard, it looks bad now but the house is still the same house. The economy continues to grow albeit at a painfully slow pace and as long as it does the market should rise. There are so many items to discuss. Obama Care, the Government shutdown, the debt ceiling, chemical weapons, the 1% rise in interest rates, or the soon to be released IPCC climate report. For brevity I will only discuss the two which currently affect us and our investments.

The debt ceiling is a big one, pun intended; $16,738,183,526,697.32 is a big number. If you divide by the 350 million people in the US it is more than $45,000.00 per person, knock the 350 million down to the number actually working and it gets larger, then consider that almost half of us working are not paying income taxes. It seems to me that this is not going to go on forever. A lot of people say not to worry because when you look at the size of the entire economy it’s not a problem. I will let the market be the judge of that and you need to consider the mechanics of how it will actually be paid. This leads nicely to the second item, the rapid rise in interest rates. Mortgage interest rates just jumped 1% in a very short time.

To illustrate its effect let’s look at a $150,000.00; 30 year mortgage at 3.5% interest, your payment is $674.00 a month. If we assume that you can only afford the $674.00 (most people buy to their payment ability) the effect of the 1% interest rise is a reduction of the amount of house you can purchase. The new loan amount is only $133,000.00, a 12.8% reduction. If you still borrow the $150,000.00 your payment rises to $760.00. Ok, very interesting but so what? If we have another rapid rise in interest rates several thing happen. First, the amount of the payment on the Federal debt (mentioned above) goes thru the roof, and at the same time, housing one of the biggest drivers of the economy, slows down or stops. This helps explain why we are having QE to infinity. We need to keep the interest rates as low as possible for as long as possible.

Willis Ashby, CFP®

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