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Hyre Weekly Commentary

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  • 1. Hyre Weekly Commentary<br />July 18, 2011<br />The Markets<br />Will they or won’t they?<br />Republicans and Democrats are squabbling over raising the federal debt ceiling and jeopardizing a projected August 2 “drop-dead” date for avoiding a default on part of our outstanding debt obligations. Both parties agree that default has to be avoided, but, so far, they’ve been unable to meet in the middle on an agreement. Meanwhile, the economy suffers.<br />Nobody knows for sure what would happen if our politicians cannot reach an agreement by August 2, but former Treasury Secretary Larry Summers took a stab at it on CNN last week. As reported by Bloomberg, Summers said a U.S. debt default would cause panic throughout the financial system and long-term uncertainty. He went even further and said a U.S. default would make, “Lehman Brothers look like a very small event.” You may recall that the bankruptcy of Lehman Brothers in September 2008 helped trigger a collapse of the credit markets and contributed to a 28% decline in the S&P 500 index over the next 30 days, according to Yahoo! News.<br />There’s no doubt that politicians on both sides of the aisle know they are playing with fire right now. That’s why very few people believe the U.S. will actually default. Instead, we may see a last-minute deal that raises the debt ceiling and sets us up for another bruising battle down the road.<br />Ultimately, tough decisions have to be made. Our country is deeply in debt and there are no easy ways to solve it. Whether it gets resolved now or later remains to be seen.<br />Data as of 7/15/111-WeekY-T-D1-Year3-Year5-Year10-YearStandard & Poor's 500 (Domestic Stocks) -2.1%4.7% 23.6%2.7%1.3%0.9%DJ Global ex US (Foreign Stocks)-2.30.017.1-0.72.25.810-year Treasury Note (Yield Only)2.9N/A3.03.85.15.2Gold (per ounce) 3.012.531.417.219.519.5DJ-UBS Commodity Index2.31.327.6-9.8-1.34.8DJ Equity All REIT TR Index-2.212.129.58.53.111.1<br />Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.<br />Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.<br />Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable or not available.<br />SPECIAL REPORT ON CHINA<br />“If you build it, they will come.”<br />That seems to be an appropriate description of China’s economic growth model. Just one look at Shanghai’s waterfront or train station is enough to leave visitors believing China’s infrastructure can rival anything in the world. <br />Here’s a June 2011 picture of downtown Shanghai looking across the Huangpu River to the ultra-modern skyscrapers on the other side. That building with the rectangular hole at the top is one of the world’s tallest buildings.<br />Used with permission<br />Just 21 years ago, none of the skyscrapers pictured above existed, according to The Atlantic.<br />FIXED INVESTMENT VERSUS CONSUMPTION SPENDING<br />A significant amount of China’s growth over the past 20 years has come from what’s called “fixed investment” as opposed to consumption spending. Fixed investment includes tangible things like roads, bridges, trains, buildings, and machinery and accounted for 46% of China’s GDP in 2010, according to the Financial Times. The June 30 launch of the Beijing to Shanghai high-speed train is a good example of fixed investment. It cost $33 billion to build, reaches a top speed of about 200 mph, and connects the two major cities in less than five hours, according to The Vancouver Sun. <br />Fixed investment is good from the standpoint that it equips a country with the tools and resources needed to grow and be productive. However, too much fixed investment can lead to overcapacity and strained budgets. <br />Rather than continuing to rely on building and infrastructure for its growth, the Chinese government has developed a plan to rebalance its economy from investment and manufacturing towards consumer consumption and services, according to the Financial Times. Ironically, this would put China more in line with the U.S., where consumer spending accounts for about 70% of demand in our economy, according to The Wall Street Journal. In China, the comparable private consumption number is 34%, according to the Financial Times.<br />One of the knocks on China is that the growth in fixed investment has risen faster than GDP and this could cause problems with too much capacity and too much debt to fund those investments. Should China falter in its effort to rebalance its economy, it could lead to domestic problems that ripple out to the rest of the world.<br />There’s an old saying that when the U.S. sneezes, the rest of the world catches a cold. Given China’s strong growth and massive size, we should be concerned about China sneezing, too. How they manage the rebalancing of their economy over the next few years bears close attention.<br />Weekly Focus – Think About It<br />“Nature does not hurry, yet everything is accomplished.” --Lao Tzu, Chinese Taoist Philosopher<br />Best regards,<br />Jim Hyre, CFP®<br />Registered Principal<br />P.S.  Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.  <br />Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC.<br />* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.<br />* The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.  <br />* The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. <br />* Gold represents the London afternoon gold price fix as reported by www.usagold.com.<br />* The DJ/AIG Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.<br />* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.<br />* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones<br />* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.<br />* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.  <br />* Consult your financial professional before making any investment decision.  <br />* You cannot invest directly in an index. <br />* Past performance does not guarantee future results. mc101507<br />* This newsletter was prepared by PEAK for use by James Hyre, CFP®, registered principal<br />* If you would prefer not to receive this Weekly Newsletter, please contact our office via e-mail or mail your request to 2074 Arlington Ave, Upper Arlington, OH 43221.<br />* The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the forgoing material is accurate or complete.  Any opinions are those of Jim Hyre and not necessary those of RJFS or Raymond James.  Expressions of opinion are as of this date and are subject to change without notice.  This information is not intended as a solicitation or an offer to buy or sell any security to herein.  Tax or legal matters should be discussed with the appropriate professional.<br /> <br />Jim Hyre, CFP®<br />Registered Principal<br />Raymond James Financial Services, Inc.<br />Member FINRA/SIPC<br />2074 Arlington Ave.<br />Upper Arlington, OH 43221<br />614.225.9400<br />614.225.9400 Fax<br />877.228.9515 Toll Free<br />www.hyreandassociates.com<br />Find Us Here:    <br /> <br />Raymond James Financial Services does not accept orders and/or instructions regarding your account by email, voice mail, fax or any alternate method.  Transactional details do not supersede normal trade confirmations or statements.  Email sent through the Internet is not secure or confidential.  Raymond James Financial Services reserves the right to monitor all email.  Any information provided in this email has been prepared from sources believed to be reliable, but is not guaranteed by Raymond James Financial Services and is not a complete summary or statement of all available data necessary for making an investment decision.  Any information provided is for informational purposes only and does not constitute a recommendation.  Raymond James Financial Services and its employees may own options, rights or warrants to purchase any of the securities mentioned in email.  This email is intended only for the person or entity to which it is addressed and may contain confidential and/or privileged material.  Any review, transmission, dissemination or other use of, or taking of any action in reliance upon, this information by persons or entities other than the intended recipient is prohibited.  If you received this message in error, please contact the sender immediately and delete the material from your computer. <br />