2011Feb13 It was the best of times, it was the worst of times

Economy:

Dickens’ famous tale was first published as a weekly series in 1859 about conditions leading to the French Revolution and readily identified by the Brits as similar to their own plight. The financial health of London, other European capitals and Washington, D.C. today is not dissimilar to the conditions Dickens described except in magnitude. So far riots have not resulted in revolution, Egypt excepted. With global food inflation rampaging, it seems premature to assume all riots will be successfully contained by the ruling bodies currently in power.

The common tie from Dickens’ story to now is the increasing transfer of responsibility for individual well being from the individual to the state. The more we expect the state to provide for us, the greater our entitlements, the more punitive taxation we must endure, and the less control we have to exercise discretion in the quality and direction of our lives.

With many negative assumptions about our economic ties with China, US exports TO China have exhibited stellar increases. US manufacturing is experiencing growth not seen in many sectors since 2004. If not squelched by rising commodity prices, this will be a positive harbinger for 2011.

Domestically, banks are preparing to implement video systems for access to financial advisors following major European banks and internal trials conducted in off shore branches. Having financial advisors available in branch locations is expensive. Expect to see a video kiosk for answers to investment questions from the next available agent. The move will decrease costs and increase compliance monitoring. The next smile you see may not be the familiar one you have grown to love and trust.

Unemployment remains a bigger problem than government statistics indicate. Recent revisions at the BLS removed 538,000 jobs reported in 2009-10. That averages 22,000 jobs reported every month for two years that did not exist. If calculated with the 1999 participation rate, unemployment would be 13%, not 9%.

Real Estate:

When trying to sum up market conditions for owners of real estate, MESSY is the term that pops up. Realtors, perennially optimistic about buying real estate, may have local market insight. However, the foreclosure news and stringent re-financing requirements continues casting a big shadow nationally. Bloomberg reports 27% of homes have negative equity as foreclosures cause values to fall and persistent unemployment reduces potential buyer demand.

 

For property owners with mortgages and some cash, there is a little used strategy for payment relief. An article for the New York Times focused on a strategy of "recasting" or "re-amortizing" to cut mortgage payments. A borrower pays off a lump sum of the principal amount then asks to have the monthly payments reset with the original interest rate and loan terms. For a nominal administration fee, the lump sum reduces the principal, so monthly payments decrease slightly, and interest paid over the life of the loan is reduced. Paying down debt is one of the best investments you can make in this economy.

 

Many home mortgages are adjustable rate loans. Before paying for refinancing, know what index is used for the adjustment and what “spread” is designated in the original loan. The 1-year Treasury rate has been 0.30% and the 1-year LIBOR Index has been 0.79%. Adding the spread may result in a rate lower than refinancing and save thousands of dollars in fees.

 

Moving might be an option for some. Boise has been business friendly for years. Currently the real estate market has been attractively re-priced. For instance, you can buy a newer 3-bedroom home with a white picket fence for as low as $80,000, or a gorgeous luxury estate home that was once $2 Million, is now $700,000.  A fourplex that was selling for $425,000 three years ago is on the market for as little as $215,000. (If you want more on Boise, contact Sandi Rubio Sandi@FrontStreetBrokers.com. Falling home prices create a cycle of deflation with negative implications for economic recovery aptly illustrated in this chart.

 

Stock Market:

Over the past six weeks, emerging markets have lost a bit of their luster. Japan and Europe have been providing stronger returns. Greece is up roughly 20% this year, but who wanted to make that bet in December? Will the shift in performance prevail or be merely another temporary resurgence? We have no crystal ball but we are watching the trend for greater staying power.

 

For the first time since 2009, investors have favored domestic over foreign funds. The domestic classification may be less meaningful as managers have been increasing portfolio positions in non-US companies or companies with significant foreign sales revenues. When competing for returns, a GDP of 2-3% in the US is significantly lower than GDP of 10% or more by investing off shore. It is time for a bit more research than relying on a fund’s name. Growing sales revenue for US companies is increasingly coming from foreign investments.

From David Rosenberg: We scoured the data as best we could and found that almost all the growth in sales is coming from outside the U.S.A. where revenues are growing at barely a 3% annual rate. The pace is around 20% for foreign-derived sources. So the question is what happens to revenues if the foreign stuff comes under some downward pressure in view of the policy tightening in most emerging markets and the fiscal tourniquet being applied through most of Europe.

 

Bond Market:

Investors are increasingly faced with deterioration in the risk mitigation of bonds in their equity portfolios. The use of exchange traded bond funds provides some options for risk management in balanced portfolios. Reported inflation remains tame but food and energy are rising and are probably the reason for continuing negative trends for bonds.

 

“When the facts change, I change my mind. What do you do, sir?”  - John Maynard Keynes

 

Our plan is “the plan will change.” What is your plan?

 

Relative strength measures the price performance of a stock against a market average, a selected universe of stocks or a single alternative holding. Relative strength improves if it rises faster in an uptrend, or falls less in a downtrend. It is easily applied to individual positions in your portfolio and to sectors and asset classes.

 

If you would like a free relative strength analysis of your portfolio’s asset allocation, sectors and positions, call us at 800-317-9119. The call is free. The report is free.