2nd Quarter 2006

The Price of Oil and Alternative Energy

The cost of energy continues its upward trend as our dependency on fossil fuels continues to increase. Increasing worldwide demand and a lack of new refineries keep the supply limited. When supplies are limited and demand is increasing, prices will go up. When prices of oil get to a certain point, alternative energy sources become financially rewarding and also socially acceptable again. For many years coal was looked upon negatively because of the emissions. With new technology many new power plants are coal fired. Nuclear plants, one of the most efficient sources of power, are again on the drawing board. Hybrid cars are the “hot” vehicle now and not the SUV.

The further problem is that somewhere down the road we will run out of fossil fuels. By incorporating conservation of the supply and further development of renewable energy alternatives we can, if we choose, extend the time that fossil fuels will last.

The most promising of renewable energy sources that are proven to work are solar, ethanol, and wind. Venture capital to improve these technologies is five times larger today than it was six years ago. When gas is cheap and plentiful as it has been for years there is no reason to look at other alternatives. But just as we became complacent with 9/11, the wakeup call has come. Look for further technology in bio-diesel and advanced solar cells. Yet untapped is fuel made from garbage and sewage, both of which currently are an expense to society, but produce no by-product.

On the conservation side individual taxpayers can take advantage of an energy projects credit from their federal income tax. This credit is available for tax years of 2006 and 2007 and can be as much as $500 per household. Check with your tax preparer to get the facts. The credit is for a portion of the cost of energy efficient windows and/or insulation materials. It also extends to heaters and boilers.

The Stock Market

On May 10th of this year the Dow Jones 30 industrial stocks were up 8% for the year. By the end of the quarter the index had given up half of that gain. The Dow Jones average has still not gotten back to its record high of 11,723, which was achieved in January of 2000. That is over six years and the Dow Jones Industrial Index has not shown a net gain. As indicated in last quarter’s newsletter, the second year of the presidential term has historically shown poor equity performance. It is common to have a 10% correction during the year. This does not mean the equity market will be down 10% for the year, but using the Dow Jones Average as a benchmark, the index may test the 10,000 level before ending the year at our current projection of 11,500.

The Bond Market

The Federal Reserve raised the discount rate by another quarter percent on June 29. This is the 17th consecutive meeting that they have raised the rate by a quarter of a point. These interest rate increases are and will have negative effects on our economy as the cost of borrowing at the household level and by the federal government becomes increasingly expensive. The housing boom that occurred in the last few years was fed in part by buyers using adjustable rate mortgages (ARMS). Many of these ARMS can adjust by 2% annually. On a $250,000 loan that is an extra $5,000 in interest per year resulting in a $417 per month increase in mortgage payment. How many households will not be able to make the additional payment?

Tax Freedom Day was April 26 this year. According to Tax Foundation President Scott Hodge, the average American has worked 77 days in 2006 to pay their federal taxes and 39 more days to pay their state and local taxes. Tax Freedom Day was three days later this year than in 2005.