June 30, 2010

Technically the great recession ended a year ago and real
economic growth, as measured by the gross domestic product (GDP), has recovered
strongly from its mid 2009 trough.
And yet the economy feels so fragile again and at risk of a U-turn into
double-dip territory. In response
the stock market has been on a roller coaster ride all quarter.

Early in the quarter Greece’s debt and solvency problems
spread fear across the globe. Before investors could conclude that they were
overreacting to Greece’s real affect on global credit markets, the Deepwater
Horizon oilrig exploded, killing 11 workers, and dumping millions of gallons of
oil into the Gulf of Mexico. On
May 6 stocks experienced and then rebounded from the largest ever intra-day
decline. Finally, by the end of June, Congressional negotiators agreed on terms
for a notable, yet controversial, financial reform bill. The bill will likely
get passed in the middle of July.

Save for the momentary gasp as stock trading went awry in
May for a day, the drying up of new home sales after the end of the government
tax incentive for first time home buyers, and the very slow recovery in job
growth, the catastrophe in the Gulf may be the biggest psychological reason
investors feel uncertain and vulnerable.

It is premature to put numbers to the spill’s impact on the
economy but the costs will surely exceed the $80 billion threshold set by
hurricane Katrina. The impact on
the Gulf’s tourism, real estate, seafood, and oil and gas industries is
wrenching and the ecological impact is tragic. We should expect to see higher
seafood prices and possibly higher gasoline prices. The higher seafood prices
will be mitigated by a shifting of resources from other domestic regions and
offshore; we import about 80 percent of our seafood and the Gulf supplies only
about 2 percent of our seafood consumption. As far as gasoline prices are concerned, we import more than
65 percent of our oil (have we forgotten that the whole point of our push into
deep water exploration has been to alleviate our dependency on foreign
nations?) and our stronger dollar will keep oil prices in check for now.

Though the domestic economy will likely not feel a large
ripple effect, the thousands of jobs lost in the Gulf region, while balanced
somewhat by new oil clean-up jobs, may impact consumption behavior and
ultimately a full recovery.

The many potholes this quarter have been jolting and recent
unemployment and housing reports were disappointing, which reinforces the fact
that we are experiencing a jobless and fragile recovery. It leaves many to wonder if our nascent
recovery is in trouble.

It is impossible to know whether positive or negative forces
will prevail. But the great debate is on amongst economists and financial
reporters. For a double-dip to technically occur, GDP would have to turn
negative again. Overall, economists are predicting that the economy for all of
2010 will slow to 3 percent growth. That is a significant decline from the 5.6
percent growth we had in the 4th quarter of 2009, but growth is growth.

Financial Reform Bill
If the economy is indeed slowing down, at least the new financial reform
bill can’t be accused of being a contributing cause. It may not go far enough
to prevent future problems but at least it doesn’t tamper too much with bank
and financial service operations. Though I sit firmly in the camp of “less is
more” when it comes to government regulation, preferring to let the marketplace
reward or punish corporate behavior, I believe that governments need to step in
and affect reasonable changes when the system is obviously outdated.

It is not a perfect bill but no one could expect a bill that
would make everyone happy. Big banks will see modest disruption to their normal
operations. The three major changes for banks are that they will have to raise
their equity capital over time, move some of their riskiest derivatives to
separate entities, and pay for a portion of the costs of the reform package
(which is estimated at $19 billion over the next ten years). The details of how
the banks will pay are still being worked out, but it may be a combination of
increased FDIC insurance premiums and a new tax payable to regulators over ten
years. The latest deal has TARP ending three months early to save money and
limit this bank tax. The tax may ultimately saddle borrowers with higher
interest costs, but talk of it hindering economic recovery is exaggerated. To
those who are angry at the notion of taxing banks at all, I say that the banks
should consider it a fair trade for being able to keep their business models
pretty much intact.

I can’t imagine there are too many investors out there who
actually believe that this bill will prevent future financial crises, but it’s
a good start. It makes a reasonable attempt to bring our financial system up to
date with derivative securities by forcing standard contracts onto exchanges
and customized contracts into reporting repositories. The bill creates an oversight council, led by the Federal
Reserve, to proactively prevent another industry meltdown. That sounds good in theory but forcing
banks to become smaller would have been a better solution.

The best part of the bill is that it provides for a consumer
protection agency focused on ending predatory lending and making sure borrowers
can afford their loans. If it
accomplishes just this it will be a big success.

Have a happy July 4 everyone.

About Ellen Le

Ellen is the Founder and President of Ascend Investment Management. She was born in Philadelphia and has lived in the Delaware Valley for most of her life. When she is not researching investments and managing portfolios, she pursues her interests in tennis, bridge, hiking and art. Beginning her investment career in 1981 as a stockbroker at E.F. Hutton and Co., Ellen now has over 20 years of investment management experience. Prior to founding Ascend in 2006, she managed high net worth assets for many years at Bank of America, Mellon Bank, and most recently at Davidson Capital Management. At Davidson Capital Management, Ellen served as a Senior Vice President and Senior Portfolio Manager of the firm. She managed assets for more than 50 family relationships and was a core member of the firm’s Investment Committee.Ellen earned a BA in History from Brown University and a MBA in Finance & Investments from The George Washington University. She is a member in good standing of the Chartered Financial Analyst (CFA) Institute, which is a global organization dedicated to setting a high ethical standard for the investment profession. Her professional memberships include the Delaware County Estate Planning Council, Women Enhancing Business (WEB), and the Chadds Ford Business Association. She is a docent with the Delaware Art Museum and an active volunteer with the Brown University Alumni Association.

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