2011Mar22 Winter Gone: Springing Forward

Economy:

Much of the US has suffered through severe winter weather which is the likely culprit for analysts' more conservative GDP forecasts. It has kept consumers home and labor demand weak. Next quarter should have a compensating spike in consumption and re-employment similar to last year. As we saw last year, robust numbers next quarter will likely be another "head fake" as the chronic problems we face are long-term.

The longed for robust growth of economic recovery remains illusive. The New Year's optimism for GDP near 4.5% is waning as estimates have dropped by a third to less than 3%. Even three is an improvement over our recent past but is insufficient to overcome persistent unemployment.

The disasters in Japan are unlikely to have any significant spill over effect on our economy. Japan receives less than ½ % of our exports. Therefore, US growth is relatively immune from a temporary decline in Japanese demand. This, also, means the US will not likely experience any significant boon from Japan's rebuilding.

The Fed is not expected to make any statements indicating a change in policy direction this week. Between Congressional spending and Fed policy, rampant deflation has been delayed.
While demographically driven consumption should increase over the next several years, demand will be insufficient to restore growth to pre-2008 levels.

Stock Market:

 

"Wide diversification is only required when investors do not understand what they are doing." -- Warren Buffett

Company analysts have been raising profit expectations while reporting the companies they follow are experiencing increased costs without pricing flexibility. That is unsustainable. Either profits fall or prices must rise. Deeper cost cutting is not a likely option. Statistically, upside surprises are becoming more difficult to obtain.

A basic premise of investing is the anticipatory nature of the stock market. Historically, the majority of investors bet on the future whether short or long-term. High frequency traders (HFT) are the exception today since they trade the spread between buyers and sellers.

As we reported to clients earlier this month, our long-term indicators suggest the stock market's trend is sustainable. A reversal in the number of stocks with bullish price trends suggests caution for intermediate term investors and a highly defensive strategy for short-term risk management and capital protection. As alerted in that report, commodities have replaced international equities as a favored asset class.

The recent market gyrations reacting to global news are knee-jerk responses for traders. The fundamentals of our economy have not been altered, and the US remains the global economic engine and world reserve currency.

Bond Market:

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 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.

"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.