Fourth Quarter Investment Commentary 2009

"Great Scott!"


In the Superman Comic series, whenever something quite surprising, unexpected or nearly inexplicable happened, there frequently came forth an exclamation “Great Scott !” The use of this exclamation precedes the superhero references though, with usage noted in literature dating back as far as the mid nineteenth century. No one is quite sure where the phrase originated. The most frequent explanation given is that it entered the common vocabulary during the 1852 Presidential campaign of General Winfield Scott.


Winfield Scott served on active duty as a general longer than any other man in American history. During his military career he served as Commanding General of the United States Army for twenty years, also longer than any other man to hold the rank. This included the command of the U.S. forces in the War of 1812, the Mexican-American War and the American Civil War. He is given credit for conceiving the Civil War strategy known as the “Anaconda Plan”, which would be employed to disable the Confederate States.


So large was General Scott’s stature by 1852, that the Whig Party passed over its own incumbent President, Millard Fillmore, to nominate Scott to run as the party’s candidate for president. As it would be today, at the time this was a rather astounding occurrence. Subsequently, when seen out on the campaign trail, people would point and exclaim “Great Scott!” Winfield Scott eventually lost that Presidential race to the Democrat candidate, Franklin Pierce.


On January 19th, 2010 an improbable victory was claimed in a special election for the Massachusetts U.S. Senate seat previously held by the late Senator Ted Kennedy. Scott Brown, a Republican state Senator, overcame more than a 30 point deficit to defeat the Democratic candidate, Martha Coakley. Prior to his victory, the Democrat Party had been pushing a widely unpopular Healthcare Reform measure through Congress, aided by a 60 vote philibuster-proof Senate majority. In his victory, Brown has now altered the balance of power within the United States Senate, taking away the 60th vote necessary to push an agenda without debate. For all intents and purposes, the Obama Administration’s Healthcare overhaul has now been derailed and if anything is to happen with Healthcare reform at this point, Congress will need to reset the discussion and perhaps even start over from scratch. “Great Scott!” I exclaim.


Labor Market


Data out the first week of this year showed that 85,000 jobs were lost in December of 2009. Despite some signs that the pace of job losses may be starting to slow, the situation in the labor markets continues to remain bleak. The unemployment rate was 10% or more for each of the months of October, November and December. The un-employment rate would have been even higher in December but for the fact that 661,000 people dropped out of the labor force, the largest monthly decline in 15 years. The “U-6” Unemployment Rate, which includes those who are “under-employed” and forced to work part-time rose to a whopping 17.3%. All of this while the average duration of unemployment continues to rise, reaching a new record of 29.1 weeks. 6.1 million people have been looking for work for more than six months.


We should finally see some positive job growth during the first quarter of 2010. The Census Bureau will hire 1.15 million people over the course of the first half of 2010, but most of these will occur during the second quarter. Already through 2009, an estimated 160,000 jobs have been created to do the preliminary work on the census. The total estimate of 1.3 million jobs created for the purpose of the 2010 census is nearly triple the number it took for the 2000 census. Think that’s impressive? It only took 125,000 to conduct the 1970 census! How’s that for Government productivity?


Across the country the story is grim. Employment dropped in 39 states in December, which is seven more than in November. According to the Labor Department, payrolls showed the biggest decline in California, with a drop of 38,800. Texas was second with a 23,900 decline, followed by Ohio with a drop of 16,700.


The number of states with at least 10% unemployment rose to 16 in December, up from 14 in November. The two newest members of this illustrious list were Mississippi, with a 10.6% unemployment rate and New Jersey, with a 10.1% rate. Michigan remained the state with the highest unemployment rate, at 14.6%, followed by Nevada at 13% and Rhode Island at 12.9%. Employment dropped in all 50 states during 2009, with Nevada, Michigan, Arizona and Wyoming showing the biggest percentage decreases. Interestingly, the District of Columbia actually showed an increase of 6,200 jobs in 2009!


The boldly promised and highly anticipated job growth that was supposed to result from the administration’s $787 billion stimulus plan last February has yet to make an appearance. Hopefully this will change as more stimulus money gets put to work, even if just for the purpose of a once in a decade head-count.


Housing Market


According to RealtyTrac, a record 3 million U. S. homes will be repossessed by lenders in 2010 as the high unemployment rate limits the number of people able to pay their mortgages and falling home prices limits their ability to sell. In 2009, there were 2.82 million foreclosures.


Here are the cumulative earnings per share results, broken down by sector:


RealtyTrac also forecasts a record 4.5 million filings, including default or auction notices and property seizures by banks and lenders in the year ahead. In 2009 there were a total of 3.96 million filings. Individually, a total of 2,824,674 properties got at least one foreclosure filing in 2009, which is a 21% increase over the 2008 total and more than twice the 2007 total. (Note: RealtyTrac’s data is collected from counties representing more than 90% of the national population.)


Nevada had the highest foreclosure rate for the third consecutive year, with more than 10% of households receiving at least one filing. Arizona had the second highest rate in 2009, at 6%: Florida was third with 5.93% and California was fourth with 4.75% of households receiving at least one filing. Together, California, Florida, Arizona and Illinois accounted for more than half the properties receiving a filing.


The National Association of Realtors estimates that home prices fell 13% in 2009, following a 9.5% decline in 2008. The N.A.R. estimates that home prices are down 26% from their peak in July of 2006. These falling prices often leave owners in the precarious situation of owing more than their house is worth. In fact, the number of homeowners with negative equity totaled 10. 7 million, or 23% at the end of the third quarter according to First American CoreLogic, a CA based real estate research firm.


The pace of prime loans going into default is now accelerating even as the default rate among sub-prime loans is finally beginning to slow. Prime loans are those made to borrowers with the best credit records, so the implication is that even good credit records can crumble when jobs are lost and workers remain unemployed.

This is a troubling trend and to me it is an indicator that more trouble lies ahead. With prime loan foreclosures mounting, we can expect home prices in general to continue to fall, prolonging the downward cycle in the real estate market.


Record Budget Deficit


The budget balance has deteriorated significantly over the last twelve months. Last month, the U.S. registered its largest December budget deficit on record. The excess of spending over revenue rose to $91.9 billion for the month as higher unemployment reduced corporate and individual income tax receipts and Government spending increased sharply.


Government spending in December rose to $310.8 billion, which was a 7.3% increase over spending in December of 2008. Revenue for the month dropped 7.9% to $218.9 billion. The Government’s fiscal year, which started in October, is off to a frightening start. Already, spending has totaled $876.2 billion. Corporate tax receipts have totaled $33.9 billion for the fiscal year-to-date, down 33% from 2008’s $50.4 billion. Individual income tax collections are down 19% so far this fiscal year.


Looking in to the specific areas where Government spending has increased , we find the following:


Social Security Administration spending has increased to $218.1 billion from $169.9 billion for the fiscal year-to-date, a 28.4% increase. Department of Health and Human Services, which administers the Medicare and Medicaid programs, had spending increase to $208.5 billion from $184.8 billion for the fiscal year-to-date, a 12.8% increase. Defense Department spending increased to $176.4 billion from $172.2 billion for the fiscal year-to-date, a 2.4% increase. Finally, spending on the Troubled Asset Relief Program, or TARP, actually fell to $6.2 billion from $91.2 billion for the fiscal year-to-date.


This ballooning deficit has forced President Obama to sign legislation to increase the U.S. Federal Debt limit, yet again. The December increase was the fourth debt limit increase in 18 months. This time around the debt limit increased by $280 billion, to a total of $12.39 trillion. Yes, that’s with a “T”. What’s even more staggering is that this increase of $280 billion was only enough to carry the Government through the next TWO MONTHS! The path this Administration is on, of increased spending coupled with decreased receipts, is unsustainable. The debt as a percentage of GDP is starting to spiral out of control.


Energy Market


The biggest news in the Energy Market during the fourth quarter was the announcement by Exxon on December 14th that they planned to purchase XTO Energy Inc. in a friendly take-over valued at approximately $30 billion. News of the deal drove the price of XTO up nearly 20%. Exxon shares slid about 5% on the news. XTO is the largest domestic producer of natural gas and this deal underscores a fundamental shift that is underway towards the increased use of domestic natural gas for our country’s energy needs.


In other energy news, the U.S. will hold 38 auctions for Oil and Natural Gas leases on federal land in 2010 as part of its commitment to develop domestic supplies, according to Interior Secretary Ken Salazar. Leases will be available in California, Wyoming, Utah and portions of Alaska’s National Petroleum Reserve. In 2009, the U.S. held 35 onshore lease sales which generated more than $126 million in revenues for the people, according to the Interior Department. The drive to develop domestic supplies of natural gas should increase the revenue we generate from our public property and common resources in the years ahead. An interesting historical note: The N.P.R. is a 23 million acre area on the North Slope that was originally set aside by President Harding in 1923 to supply oil to the Navy.


Car Market


China surpassed the United States in 2009 as the largest auto market in the world. Chinese total vehicle sales jumped 46% in 2009, to 13.6 million units. Within that number, passenger car sales rose 53% to 10.3 million, according to the China Association of Automobile Manufacturers. The remarkable growth of the Chinese vehicle market had been the result of a decade of overall economic growth which has averaged more than 9% per year. The 2009 numbers were particularly strong because of the Chinese Government’s decision to cut in half the sales tax on new vehicles. What a fine idea, to stimulate growth and develop markets through the use of tax cuts.


All That Glitters


The central banks of China, Mexico and Russia have all added to their gold reserves over the course of 2009. Every Central Bank with a large holding of US Treasuries is worried about the loss of capital that might result from a continued decline in the US dollar. The latest Central Bank to get into this game is the Reserve Bank of India. On November 3rd, 2009, the RBI said it had bought 200 tons of gold from the IMF (International Monetary Fund), in a purchase that totaled approximately $6.7 billion.


The IMF has the third largest official holding of gold in the world, and its sale to the RBI is just part of a larger plan it has to sell over 2,000 tons of Gold over the next five years. News of the sale did not depress the price of gold, actually quite the opposite happened. In the month following the news of the RBI purchase, gold went from approximately $1,050 per ounce to over $1,200 per ounce. It now rests around $1,100.


Literature Market


Enough time has passed now since our current financial malaise first took hold that several very fine books are available to give insights into just how and why it all happened. For those of you who might be interested in that sort of thing, I recommend the following two books: House of Cards – A Tale of Hubris and Wretched Excess on Wall Street by William D. Cohan and Too Big to Fail by Andrew Ross Sorkin.


House of Cards chronicles the crumbling of the Investment Bank Bear Stearns in March of 2008. It details how Bear Stearns had $17.3 billion on hand one day and then several days later it ceased to exist. With a novelistic style, this minute by minute account of 10 days in March will draw you in as well as any piece of fiction.


Too Big to Fail is a gripping financial narrative of the actual people involved, both in the business world and in the government, during the events surrounding the bankruptcy of the Investment Bank Lehman Brothers in mid September of 2008. It is very thorough in covering all of the players (Paulson, Bernanke, Geithner, Dimon, Fuld, etc.) and the institutions involved in the meltdown plus the subsequent attempts to deal with the ensuing calamity. Sorkin successfully shows the actual character of the people whose names are so familiar now, all while filling in the blanks of what really went on behind the scenes of the fast and furious dealmaking.

"Greuss Gott"


Although the most common explanation for the exclamation “Great Scott !” derives from the legendary history of General Winfield Scott, there is another commonly accepted explanation for it’s origin. This one stems from the transformation of the German greeting “Greuss Gott” which means (roughly translated) “Praise God” or “Greet God”.


“Gruess Gott” is the shortened form of “may God greet you”. The essential meaning of “Greuss Gott” is therefore “God bless you”. Such a religious exclamation in a greeting exists in several languages. For example, people wish one another a “good day” in Spanish with “Buenos Dias”. Similarly in English, with “goodbye” which was originally a contraction of “God Be with Ye”. A religious origin is also obvious in the Spanish “adios” and the French “adieu”. So again I’ll say to you, “Great Scott!”




McKim Williams, Jr.
Chief Investment Officer 
January 23rd, 2010




The opinions contained herein are those of McKim Williams, Jr. as of the date of publication and are subject to change without notice. The contents have been compiled or derived from sources believed reliable. Old Point Trust makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions which may be contained herein and accepts no liability whatsoever for any loss arising from any use of or reliance on this report or its contents. Old Point Trust, its affiliates and/or their respective officers, directors or employees may from time to time acquire, hold or sell securities mentioned herein.