2011Jan30 Capital Goes Where It Is Welcome

Economy:

There are several factors for capital to be well treated. The legal system must provide strong support to contracts and neither regulations nor taxes can be onerous. Compared to our global competition, the U.S. does not fare well in the latter two categories and is deteriorating in the former as illustrated in the federal government’s actions with GM and Chrysler. Legal claims of debtors were arbitrarily discarded for the benefit of politically more attractive junior claims.

 

Further, The Secretary of HHS has granted nearly eight hundred waivers to groups and companies to avoid complying with the new health care law. Law by cronyism is not a legal system based on “equality before the bar.” The lady of justice can now remove her blindfold and place a finger on her scales to achieve a particular outcome.

The National Network for Health Innovation’ mission statement is:

 

“Driving Policy Change"

Founded in 2002, NEHI is a nonprofit, independent health policy institute dedicated to transforming health care for the benefit of patients and their families.”

Ironically, it sought and has been exempted from our country’s newest health care innovation!

Meanwhile, news on the manufacturing front refutes common conceptions about U.S. dominance. Adjusted for inflation, U.S. manufacturing has outpaced all other countries since 1970. Even with the recent recession, we are manufacturing more than any one else. Further, our productivity per worker has tripled. Automation and technology are likely more responsible for job contraction than outsourcing. However, the above quote from Walter Winston is applicable here.

Careful analysis of unemployment data indicates only 47% of the labor force is fully employed. Staff reductions still plague the economy. North and South Dakota and Nebraska have the lowest unemployment rates. Texas has had the most hiring.

Real Estate:

With 47 years of data to reference, 2010 recorded the lowest number of new home sales! Economists assume 600,000 new homes must be sold for a solid economy. At just over half, sales must be much stronger -- a situation that is not likely to improve any time soon. We have a “demographic hole” in the X-Gen population that will soon be able to enter the housing market much more reasonably than many of their parents before them.

 

Housing prices slide again in 19 of 20 major markets. David Blitzer, S&P 500 Index Committee chairman, is not optimistic about future price trends. With prices expected to decline further in the next six months, the recent weak rebounding trend seems unsustainable.

Locally, a Tacoma client with property on the market reported buyers are asking sellers to fix every deficiency indentified in an inspection and pay 100% of closing costs. That’s with a low ball offer. It is a buyer’s market that will not change any time soon – except for the Washington, D.C. metro area where the federal government is hiring.

 

As if the messes at Fannie Mae and Freddie Mac haven’t already cost taxpayers enough, we have spent another $160 million defending the (not so) responsible execs whose oversight included massive fraud. Mortgage lenders will maintain stringent credit requirements as long as they may be required to keep the loans they do make. If “Frannie” hadn’t been a de facto taxpayer guarantor of all mortgage loans, the real estate bubble would have had difficulty occurring.

 

Stock Market:

One of the short-comings of the stock market is the focus on quarterly earnings. It does provide a temptation to some to “jigger the numbers.” Just think of Enron, Tyco, Fannie Mae and Freddie Mac. Quarterly, companies “provide guidance” and analysts update earnings forecasts for investors looking into the future.

 

The current earnings season has been generating positive news for the majority of reporting companies in the S&P-1500. Sectors with improving numbers are energy, financials, health care, industrials and telecom services. Consumer Discretionary, Technology, Materials and Utilities have been reporting positive numbers but weaker than previous quarters. The good news has been over shadowed by civil unrest in the mid-East. The Consumer Staples sector has had negative revisions.

 

This week was the first since the fall of 2008 that the Dow crossed 12,000 and the S&P-500 crossed 1,300. The week ended on a sour note with news of continuing riots in Egypt. Friday’s 2.5% decline did not bring smiles to investors’ faces, the technical underpinnings for a continuing advance in prices remains in place. Positive earnings reports and low interest rates create good future value.

The market has been over bought for several months. Selling pressure would lower prices to more reasonable levels to commit cash and have better risk controls in place. Recent market advances have occurred with very low volume. Only ten stocks in the Dow have been causing its rise. This graph from B.I.G., LLC. illustrates why we have been hanging onto cash from sales.

 

Assets priced at the top of their 10 week trading band inherently have higher short-term risk than if priced in the bottom or middle of the trading band. Patience for more overall price deterioration will improve the likelihood of positive portfolio returns.

 

Bond Market:

Not all bonds are equal. Secondary investment grade and high yield corporate bonds remain attractive. Investor fears and the resulting liquidations of muni bond funds have not slowed new issues. Both corporate and municipal issuers have been successfully borrowing money. Except for first time issuers, recent interest rates have not been radically higher than expected.

Understanding the issuer’s balance sheet is more important than ever. Years of reliance on “insured” bonds came to an end with the discrediting of bond insurers in recent years.

 

Investors’ concerns are in identifying whether their bond is subject to the problems found in Vallejo, CA or Nassau County, NY. The former is trying to exit bankruptcy discounting unsecured debt 80% to 95%. The latter’s politicians have been unable to create a budget. The NY State Finance Board has taken over one of the richest counties in the country! It isn’t due to a lack of taxes, either.

 

“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.