Budgets and Investing

This past week, the news was full of state and federal budget information. In particular, was the budget battle in Wisconsin. Enough people are giving the political implications of these events so I would like to cover the investing side, in particular interest rates and stock prices. First will be a section from Vanguard. At the end is a section on NBA All Star Game Facts, which is being played today.

Vangaurd

The Federal Reserve grew more confident in the strength of the U.S. economy, but not enough to pull back from its second round of quantitative easing. High unemployment remained a challenge. Rising commodity prices began to tug at the pockets of consumers and producers, but general inflation in the United States was not yet a concern. For the week ended February 18, the S&P 500 Index rose 1.0% to 1,343 (for a year-to-date total return—including price change plus dividends—of about 7.2%). The yield of the 10-year U.S. Treasury note fell 5 basis points to 3.59% (for a year-to-date increase of 29 basis points).

Government Budgets and Investing

What is the big deal about all of the state and federal budgets that are being discussed in our country? Normally, this is a topic that makes people yawn except for this year. Budget exercises are kind of like going to the dentist, you know you need to do it and you never look forward to it.

The key topis this year is how to balance a budget and the implications of getting it balanced. So from an investor's point of view this is very important. At risk is the credit rating of each state and the federal government. When an organization does not act fiscally responsible, such as a business or government agency, the credit rating agencies like Moody's gives it a lower score. A lower score means that a higher risk exists for defaulting, or not paying back a loan, so the interest rate that must be paid goes up. The lower the rating the higher the interest rate.

So if these budgets are not balanced, the interest rate that is paid by the government agency on the loan that is needed to cover the shortfall goes up. As more and more money is needed the rate goes higher and higher. With higher interest rates comes a lot of negative long term consequences. Stocks do well when interest rates are low and when they are rising in a normal range. When interest rates are high stocks do very poorly.

As investors, if budgets are balanced then we are happy and invest in a normal fashion. If budgets are allowed to have growing deficits then investors need to take action and become defensive. Higher interest rates are bad for virtually all types of bonds and stocks. I am rooting for a balanced budget for each state government and the federal government, to take smaller actions now avoiding much larger actions later.

NBA All-Star Game Facts

•The first NBA All-Star Game was held in Boston in 1951.
•The NBA Rookie Challenge, a game between the best first and second year players was first held in 1994.
•The Slam Dunk Contest features the NBA's highest flyers and most dominating dunkers and was first held in 1984. Previous winners include Michael Jordan, Vince Carter, Kobe Bryant and Jason Richardson.
•The highest scoring NBA All-Star Game was in 2003 when the Western Conference beat the Eastern Conference 155 - 145 in a double-overtime scoring fest. Kevin Garnett poured in 37 points and was named the game's MVP.
•The most points scored in a game by one player is 42 points, set by Wilt Chamberlain during the 1962 NBA All-Star Game.
•Michael Jordan holds the record for most career points in NBA All-Star Games. He scored 262 points while playing in 13 NBA All-Star Games.