When it comes to Social Security, no one likes to talk about possible cuts in benefits. Yet everyone agrees that without some significant changes, the program cannot remain solvent for long. In fact, the Social Security Administration includes this warning on annual statements it sends to participants: “The Social Security system is facing serious financial problems, and action is needed soon to make sure the system will be sound when today’s younger workers are ready for retirement. …Without changes, by 2037 the Social Security Trust Fund will be exhausted and there will be enough money to pay only about 76 cents for each dollar of scheduled benefits.”

A June 17 article in the Wall Street Journal indicated that the AARP “is dropping its longstanding opposition to cutting Social Security benefits, a move that could rock Washington’s debate over how to revamp the nation’s entitlement programs.”

This week, however, AARP said it remains steadfastly opposed to any reductions in Social Security benefits. According to a YAHOO! news article, in an email posted on The Daily Kos, AARP CEO Barry Rand stated, “Contrary to the misleading characterization in a recent media story, AARP has not changed its position on Social Security.”

Whether or not AARP has changed its position is irrelevant to the reality of the situation. The truth is that changes must be made in order for the system to remain solvent.

The truth is that Social Security benefits have already been reduced for Americans born after 1938. Instead of qualifying for full benefits at age 65, someone born in 1938 can’t collect full benefits until age 65 and two months. For someone born in 1960 or later, the age for collecting full retirement benefits has been pushed back until age 67. While that might not seem like a big deal, it means a loss of 24 monthly payments. For someone who is getting a monthly payout of $1,600, that a total of $38,400. Multiply that by hundreds of thousands of Social Security recipients and it amounts to a significant sum.

According to a report released this month from The National Academy of Social Insurance, amendments already approved will reduce total Social Security benefits by about 19% for those born after 1938. In addition to raising the age for full retirement benefits to 67, other changes include:

•    Taxing part of benefit income, which results in a 5.1 percent benefit cut.

•    Delaying the cost-of-living adjustment by six months, resulting in a permanent 1.4 percent cut.

Lawmakers don’t have many options when in comes to making changes to close the future gap in Social Security. The YAHOO! article highlighted three possible solutions:

“They can raise the retirement age years down the road, they can cut benefits by using a chained version of the Consumer Price Index to determine cost of living adjustments, or they can cut benefits by changing the formula used to determine benefits. These three scenarios were actually proposed back in October by the Social Security Administration. Here is a run-down of the three options highlighted in the report presented to the House Ways and Means Subcommittee on Social Security.

“Again, this plan keeps the retirement age the same. It also prevents cuts for the poorest of retirees. The issue with this proposal is that the cuts begin for those with earnings of $43,084. Those earners would see a 6.3 percent change in their benefits, equaling about $200 per month. Someone with a salary of $43,000 is hardly wealthy, and may not be able to afford the cut.”

It is not surprising that politicians do not want to tackle this issue directly. Social Security benefits are the primary source of income for more than half of older Americans and that number is likely to grow significantly as baby boomers retire. Any benefits cuts are likely to be highly unpopular and those who vote for cuts will put their political lives in jeopardy. So instead of talking about cuts, politicians use words like reform and recalculate.

Continued weakness in the economy is making the situation worse and bringing a day of reckoning closer. In 2010 Social Security paid out more in benefits than it took in. That was six years earlier than projected. Obviously the sooner the problem is dealt with the better and it is unlikely that the folks in Washington will be able to make everyone happy, no matter what changes are made.

For a wealth of information about Social Security information, please check our web site at www.sfginvest.com.

Flint Stephens

Over the past week, major market indices have made little progress. On the other hand, they also have held their ground and not broken below key technical support. While today’s picture might not seem much different from last week, there are hopeful signs.

Below is a chart of the S&P 500 over the past six months. This style of chart is called a “candlestick.” The body of the candlestick reflects the area between the open and closing price of a security. The wick illustrates the highest and lowest traded prices of the security during the time interval represented. If the security closed higher than it opened, the body is white or unfilled, with the opening price at the bottom of the body and the closing price at the top. On losing days, the body is red, with the opening price at the top and the closing price at the bottom.

One of the first things one can notice from this chart is that the S&P 500 has moved steadily downward since the beginning of May. For many investors, that has meant six weeks of pain as they watched account values decline. The pain grew more intense at the beginning of June when the index slid six straight sessions and dropped almost 5%. That period is easy to see on the chart because it is dominated by red candlesticks.

This week provided evidence that the pain might be ending. First, I added a blue line to the chart to show the closest level of strong technical support. This marks stocks reached during an earlier intermediate correction that ended in March. So far the S&P 500 has not violated that level.

Last week I noted that major indices had fallen for six straight weeks for the first time since 2002. That string was broken this week as equity markets posted gains for the first week since back in April.

This week has seen more white or open candlesticks than red—a hopeful sign that we might have reached the bottom of this corrective cycle.

The bottom portion of the chart is a moving average convergence divergence (MACD). As noted last week, this indicator like most others is showing that the S&P 500 is oversold and likely on the verge of a rebound. Of course, there are no guarantees when it comes to the financial markets, but certainly there is plenty of reason to anticipate that a rally over the next few weeks is a good possibility.

Flint Stephens

In recent weeks headlines for the economy and the stock market have focused on doom and gloom. It’s been a tough year for investors because to date most major indices are flat for the first five months. Things are so bad that it might be time to start expecting them to get better.
As mentioned many times in the past, forecasting the financial markets is a difficult proposition. Basing investment decisions on emotion or on speculation about what one thinks might possibly occur is not an effective strategy. As investment managers, we look at a wide range of technical tools to assess the current state of the markets. Then we also look at fundamental factors that might be influencing the overall economy and the markets. Finally, we must always consider the possibility that our assessment is wrong.

At present, the assessment process leads us to believe that the recent corrective market action might be nearing an end.

The chart below shows the price movement of the NASDAQ over the past two years. The red line on the top portion of the chart highlights the level where this index began 2011. As one can see, the Nasdaq is just about even in 2011.

For the next three sections of the chart, I added a pink shaded area or line that highlights the areas that indicate when the index has reached an oversold level. Let’s start with the second of the three sections which shows a stochastic oscillator. As measured by this oscillator, the Nasdaq is currently at its most oversold level of the past two years. This indicator usually does a good job of identifying when investments have reached highly overbought or oversold levels where a turnaround can be expected. Based on the stochastic oscillator’s current level, an upturn in the Nasdaq would be expected.

The other two sections of the chart are a moving average convergence divergence (MACD) and a relative strength index. Both of these indicators are also showing that the Nasdaq has reached a high level of selling pressure, although they are not reflecting the same degree of oversold momentum as the stochastic oscillator.

This appears to be a critical situation for major market indices. So far, the uptrend of the advance that began more than two years ago remains intact, but barely so. A month ago we wrote that the summer months are often a weak time for stocks. That makes markets more vulnerable during those periods. Any unexpected negative news or event could be the catalyst for a major sell off as investors and traders decide it is time to head for the exits.

The Dow Jones Industrial Average has now had six losing weeks in a row. The last time that occurred was in 2002 after the collapse of the dot-com bubble. The good news is that even after six weeks of decline, most major indices are only down 5% to 8% from their recent highs.

Based on what our technical indicators are showing, the worst of the pain for this downturn should be just about over. Of course that does not necessarily mean stocks will instantly rebound and head back to previous highs. But at least there is likely to be a few days or weeks of relief.

Obviously, there is no guarantee that this won’t be the time that major indices endure seven or even eight losing weeks in a row. But for now, betting against the technical indicators would seem to be the riskier alternative.

Flint Stephens

Major stock indices continued their slide this week primarily because of data that shows the economic recovery is unwinding. Further evidence of that came Friday with release of the May jobs report from the U.S. Labor Department.  Employers added only 54,000 new workers in May, the fewest in eight months, and the unemployment rate rose to 9.1 percent. That’s a drop from the average of 220,000 jobs that the economy added in the previous three months. Private companies hired the fewest new workers in nearly a year.

Another report this week showed that housing prices continue to slide. Home prices decreased 5.1 percent in the first quarter from the same time in 2010, according to data from S&P/Case-Shiller. Home prices are now at a five-year low, according to this measure.

Wednesday’s steep fall might have been precipitated by an unexpected decline in consumer confidence. The Conference Board’s confidence index dropped to 60.8 from a revised 66 reading in April. That reading was a six-month low. Wall Street traders watch consumer confidence numbers carefully because consumer spending is very important to the U.S. economy. The sentiment index is viewed as a leading indicator because it gives a snapshot of consumer attitudes about spending and the economy.

Major stock indices are now in their fifth week of decline. The S&P 500 is still up about 3% for the year, but failed to make any real headway since the end of January. The chart below shows how the index has performed over the past year. From a technical perspective, the gold line on the top portion of the chart is a simple 50-day moving average (MA). After hovering around its MA for a couple of weeks, the sharply negative tone of the market in recent sessions has pushed the S&P 500 well below its 50-day MA.

The middle portion of the chart is a moving average convergence divergence (MACD). The best use of this indicator is to identify the direction of market momentum and to determine likely turning points after stocks become overbought or oversold. Right now this indicator is showing that momentum for the S&P 500 is negative. The index has not yet reached an oversold level so there is not a high likelihood of a turnaround at this level.

The bottom portion of the chart is a stochastic oscillator. Like the MACD, it helps identify turning points and whether or not stocks are overbought or oversold. This oscillator, however, is measuring a shorter period than the MACD. The oscillator is currently showing that the S&P 500 has become oversold on this shorter-term basis. That means it is likely the index will rebound over the next few sessions.

The combination of fundamental and technical indicators is creating a picture of a market that is losing strength and momentum. If this situation does not change quickly, a more serious downturn could be on the horizon. Investors need to keep close tabs on their accounts at this important juncture.

Flint Stephens