Looking at Some Economic Indicators – Fall 2005

Better Than It Seems

As we’re meeting with our clients this fall, many are pleasantly surprised with the performance of their investment accounts. We frequently hear something like “ That’s great. With the market and economy being in so much trouble we were concerned that our investments may be as well” It seems that today more than at any other time, the perception of both the economy and the markets (mostly from the media) is very much different from the reality (the actual performance numbers).

The perception: crippling hurricanes, high gas prices, increasing interest rates and, so far this year, a quietly sagging stock market. Ouch!

The reality: Hurricanes? Nothing new there. Gas prices? Adjusted for inflation, the’re in the same neighborhood as 1982*. Interest rates? It could be that the rising interest rates are a positive indicator about the strength and the expansion of our economy. A quietly sagging stock market? Truth be known we’ve come to appreciate quiet markets.

Let’s take a look at some economic indicators.

  1. The Department of Commerce reported that second quarter 2005 Gross Domestic Product grew at a 3.3% annualized rate. A good rate.
  2. Housing starts rose 3.4% for September 2005 to an annual rate of 2.11 million units**. This is the fastest pace since Feburary and one of the highest rates ever.
  3. The Bureau of Labor and Statistics reported that the September 2005 unemployment rate was 5.1% (not the best we’ve ever seen, but certainly not the worst). Over the last twelve months ending in August 2005, payroll employment grew by an average of 194,000 a month and the unemployment rate has trended downward during that year.

Those of you who have been investors over the last ten,twenty, thirty or more years know that there is always an abundance of negative news. You also know how well the markets overall, and in particular your individual investments, have performed over those same periods.

We’re not saying that everything is rosy; we know that there is room for improvement. We are however, recommending that the next time you feel a little uneasy because of the current dose of bad news, call us for a closer look at reality.

Thanks for your business,
Sycamore Financial Group

*The Big Picture. Posted 8/17/05
** U.S. Department of Commerce report dated 10/19/05

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Past performance does not assure future results. Investors cannot invest directly in the stock market indexes such as the S&P 500. Invest return and principal value of an investment will fluctuate. Investor value, when sold, may be worth more or less than their original cost. The material in this presentation is for illustrative purposes and does not reflect any particular investment.

By |2022-07-21T12:13:34-04:00August 20th, 2005|2005 Newsletters|0 Comments

Changing Interest Rates – Spring 2005

Hello from Sycamore,

Corporate Bonds and Changing Interest Rates

Many of you own corporate bonds and recently, after receiving your monthly statements, a few of you have called to see what’s wrong with you your “fixed” investments. Sooo….we thought this may be a good time to review how most corporate bonds work and discuss how future interest rate changes may effect your bond investments in the future.

Generally speaking, bonds and other fixed rate investments guarantee the interest that you will receive and the return of your principal at some future date known as “the maturity date”. This means that if you invest $1,000 into a $1,000 bond that pays 3% interest and matures in three years, you will earn $30 per year in interest ($90 total). When the three years have passed the entity guaranteeing the return of your principal will pay to you the original $1,000 that you invested. It’s important to note here that the guarantee of the return of your investment is only as good as the entity that is making the guarantee. During the time between your purchase and the maturity date, the market value of your investment can, and most likely will, fluctuate.

Here’s an example of how that may work and why. Let’s suppose that interest rates were at 3% when you bought the above hypothetical bond. Then, during the next year, interest rates rose to 4%. Compared to the current interest rate of 4% your investment (which is still earning 3% because the interest rate is guaranteed) looks a bit puney. Because another investor buying a bond today knows that they can receive 4% by purchasing other bonds, they will not want to pay you the full maturity value ($1,000) for your bond because it pays less interest (3%). So, in our hypothetical, if you decided to sell your investment after holding it one year instead of keeping it untill the maturity date, (something that you can do with most fixed investments) you would be forced to reduce the sale price to a level that would allow the new buyer to attain a yield of 4% on their investment.

All bond purchase or sale transactions are published, so at the time that you buy or sell, your transaction would determine the current market price of your 3% bond. If your sale had taken place at a price of $850 for example, then all other investors who hold this same 3% bond would see their bond valued at $850 also. This would give them a good idea of the amount that they would receive today if they would sell their bond, but have virtuall no effect on them if they are going to keep their bond until maturity. Remember, at the maturity date, investors get the full $1,000 principal amount returned, regardless of current interest rates.

So how does this affect you? If you own bonds, or other fixed interest rate investments, in todays rising interest rate environment, your monthly statements will likely show a decline in the market value of your investments. Remember, this market value is important only if you are actually going to sell your investment prior to the maturity date. If you intend to keep your bonds untill the final maturity date, this “current market valuation” is simply FYI and when the final maturity date arrives you will realize the rate of return that you locked in when you originally purchased your bond.

If interest rates continue to rise (we think that is likely in the near future) your “market values” will probably decline some more. If interest rates reverse direction and start to decline, then you will see your “market values” begin to rise. Generally speaking, bonds with longer maturity dates will fluctuate more that shorter term bonds. Because of this and our current rising interest rate enviroment, we have been recommending that investors purchase bonds that have short (three to five years) maturity dates. Also, since your principal return is guaranteed by the company that you are investing in, we recommend that you buy only “investment quality” bonds.

We realize that these concepts are somewhat confusing, so if you have questions or would like more information give us a call or drop an e-mail.

Thanks for your business and trust,

Sycamore Financial Group

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Past performance does not assure future results. Investors cannot invest directly in the stock market indexes such as the S&P 500. Invest return and principal value of an investment will fluctuate. Investor value, when sold, may be worth more or less than their original cost. The material in this presentation is for illustrative purposes and does not reflect any particular investment.

By |2022-07-20T15:33:27-04:00April 28th, 2005|2005 Newsletters|0 Comments
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