2011Mar28 No Shortage of Newsletters
2011Mar28 No Shortage of Newsletters
“At the approach of danger there are always two voices that speak with equal force in the heart of man: one very reasonably tells the man to consider the nature of the danger and the means of avoiding it; the other even more reasonable says that it is too painful and harassing to think of the danger…and that it is therefore better to turn aside from the painful subject till it has come, and to think of what is pleasant. In solitude a man generally yields to the first voice; in society to the second.” -- LEO TOLSTOY, War and Peace
Stock Market:
There is no shortage of newsletters forecasting the future of stocks or the market. Subscribers recognize the dynamic nature of markets and the need for adjustments. Academics, however, continue tweaking the half century old “modern” portfolio theory of Dr. Markowitz while denying its flaws. The benefit of tracking prices is investments are based on what is happening instead of betting on what should be happening.
Economy:
The impact of the disasters in Japan will remain unknown for some time to come. Deliveries of autos and technology components may be disrupted and not in line with consumers’ normal expectations for product. Exports from the US and China will likely shift from consumer items to materials required for reconstruction.
Neither the US nor China are highly dependent for economic growth on Japan’s imports. The “big picture” is the global economy adjusting to the disasters in the midst of anemic growth wherever one looks. Recoveries from financial shocks are typically weak, and the current one is no exception.
Central bankers have already fired both barrels normally used to boost an economy. Interest rates are essentially zero, and deficit spending has mushroomed beyond the public’s tolerance. The back up plan, quantitative easing (QE), has pumped money into the capital markets attempting to create a sense of security for investors through the “wealth effect.”
QE is untested and, according to Chairman Bernanke’s Congressional testimony, the Fed does not know if it will work. Recent surveys of retirees suggest the results are not what the Fed wants. In recent decades, the Fed’s current policy would be associated with resurging inflation. This time is different. The Fed has not been able to money supply as fast as borrowers have been shrinking it through deleveraging.
In spite of denials by the Fed, global inflation of raw materials and food is occurring. We see it in food prices because we now compete with other nations for food. We no longer eat solely from produce or protein made in the USA. Raw material prices are being built into future prices that will impact consumers later this year. At that time, the Fed will be boxed in between the need for higher interest rates to tame inflation and the recession-causing impact of its actions. No one knows what the Fed will do then.
Real Estate:
With residential property values expected to decline another 10% this year, an additional 2.4 million borrowers will have negative home equity. GMAC and Wells Fargo have had a change in their corporate hearts or, at least, changed policies affecting home owners who need loan modifications.
Major banks have been slow to accept the persistence of falling home values. Recouping capital at foreclosure sales is no longer reality. Accepting smaller payments and principal deferment is less costly than holding a foreclosed property.
Many first time buyers are opting to rent since home ownership is no longer a certain road to wealth. Lacking demand, sellers are facing 20% discounts to attract buyers. Recovering real estate demand is the foundation for economic labor market recovery. Sustainable improvement remains elusive.
Bond Market:
In case you missed this last week. We reported:
“Yields on Treasuries have tapered off over the past month and a half reflecting reductions in anticipated GDP and reduced inflation concerns. Yields have become so low that PIMCO, the largest bond fund manager in the world, has sold 100% of its Treasury holdings. Carefully chosen corporate, high yield and emerging market bonds are now the focus for PIMCO.”
While Treasury prices rebounded slightly after PIMCO’s disclosure, the long-term trend remains in tact. Bond exposure should be minimized by investors who are concerned about inflation causing higher interest rates later this year.
"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.
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