2011Jul25 Debt Limit Chicken Is a Real Turkey

DEBT CEILING: 

"Some debts are fun when you are acquiring them,

but none are fun when you set about retiring them."

-Ogden Nash

 As of this morning there is still no deal on raising the debt limit, or even a framework to work from for that matter. We said last week that there is no good side to a U.S. default and we stand by that statement. Even though "Armageddon" may be a little over the top it will not be pretty.

With such a large deficit any increase in the interest rate would be very costly indeed. If treasuries (the gold standard world wide for safety) are downgraded all bond portfolio holdings will be downgraded also. No one knows where that domino effect will end.

With each passing day the pressure to get a deal done increases and we feel that it will get done at some point. Predicting the outcome of this one gets a little murkier each day and with each partisan political statement.

MARKETS:

"It's never paid to bet against America. We come through things,

but its not always a smooth ride." ~ Warren Buffett
 

The second quarter of the year has now come and gone and the Summer of 2011 is in full swing. For some this means spending the afternoons floating in the pool, stretched out in front of the AC, or perched up a few thousand feet in the cool mountain breeze. There are a variety of ways for staying cool in the summer months, but in order to achieve your goal of staying cool you must be proactive. The same holds true for managing risk in the stock market.

There are many positive signs taking place in the equity markets right now, and we wanted to take a minute to update you on some of the things that we see taking place in the market right now. For starters, one of the indicators that we follow regularly is the NYSE Bullish Percent, which is simply a measure of supply and demand in the marketplace.

The most recent change in the indicator suggests that, generally speaking, demand has regained control, which is a positive sign. A change in this indicator directs us to shift our focus to that of accumulating wealth instead of wealth preservation. With that said, here are some of the themes that are shaping up in this market.

• After a review of the historic "summer" returns of the equity market to determine if there is a bias towards the annual "Summertime Blues" or "Dog Days of Summer" argument that is often applied to the market we find that over the previous 30 years, 13 summers (or 43%) have been losing summers for the S&P 500 (12 for the DJIA). We do not have a crystal ball to know how the rest of the summer will unfold, but it is interesting when we look at those summer months that have seen a decline, the vast majority of them came when the NYSE Bullish Percent was declining. As I mentioned above, the most recent movement in the NYSE Bullish Percent was back to positive, which suggests a better risk environment for stocks.
• Nearly 70% of all stocks trading on the New York Stock Exchange are in a positive trend today, which is to say that the majority of stocks continue to show positive trends. I should note, also, that all of the major equity indices continue to trade in a positive trend, which is another positive sign for the market.
• Focusing within the Domestic Equity arena, the Smaller and Medium sized companies (and stocks) continue to assert themselves as leaders over the Larger stocks, and thus present greater potential capital appreciation. Consider this, the vast majority of equity indices peaked back in October of 2007 before enduring the subsequent bear market in 2008 and the first part of 2009; however, while the Large Cap indices have yet to recover from their bear market losses, the Small Cap indices are perched above their 2007 levels this month. The S&P 500, the most widely followed stock market index comprised of mostly Large stocks, is roughly 15% below where it peaked in October 2007 while the S&P 600 Small Cap index is more than 7% above those 2007 highs. This is to say indices with a bias towards Smaller stocks are moving to new all-time highs.
• The US Dollar continues to trade in a long term negative trend, and while the US Dollar has seen a bounce off its April 2011 low, the US Dollar remains about 15% below is June 2010 peak. All in all, the picture for the US Dollar is not a healthy one. As a matter of fact, there are a number of other currencies that look attractive here like the Australian Dollar and Swiss Franc to name a couple.

We have no way of knowing how this offensive possession will play out. Ideally, we keep the offensive team on the field for a long, sustained drive. We are not going to anticipate when we think the market rally has exhausted itself; rather, we will let the market tell us when the time is right. Additionally, as this offensive session progresses we will be monitoring the overall market, looking for any other potential areas of leadership. We will adhere to both the buy and sell side of our decision making process and let the discipline successfully navigate this market. In the meantime, kick back, relax and enjoy the rest of the summer.