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• 2010Dec19 Week In Review: Is t...

“A question that sometimes drives me hazy: am I or are the others crazy?"

Stock Market:

According to Wikipedia, "haze is traditionally an atmospheric phenomenon where dust, smoke, and other dry particles obscure the clarity of the sky." Whether looking at the stock market or the economy, traditional measures have become increasingly hazy. Optimism about higher highs is only good until it isn’t.

If investors were focused on the stock market over the last year and a half, then one would think that they would quit pulling money out of domestic equity funds. Yet, domestic equity funds had another $1.8 billion in redemptions just last week, bringing the total redemptions for 2010 to $81 billion.

Investors are focused on what it will take to get their portfolio value back to 2007 levels. They are wondering when the next 2008 will come along. Whether or not you believe that another 2008 is just around the corner is somewhat irrelevant. They generally believe there is a distinct possibility that we are not out of the woods with this economic crisis. Both investors and advisors increasingly doubt that modern portfolio theory is the strategy that will deal with that possibility.

Investors are now facing headwinds that may be the “bell that does not ring” when markets change direction. Rising interest rates in the Treasury market are in opposition to the Fed and QE2. The objective of QE2 is to keep long-term rates low to support stocks and housing. The Fed is losing in the market place which is where it matters. Rising interest rates are challenging for stocks and a killer for bonds.

          “I sincerely believe…that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale.” – Thomas Jefferson

State revenues have been in serious decline since 2008 while municipalities maintained rising trends which are expected to reverse within months. With 90% of all cities (not states) cutting budgets in 2011 and labor being the largest expense, unemployment may rise 1.7% as more than 2M workers are expected to be let go. A mere 10% cut back in budgets would reduce GDP by 1% adjusting consensus forecasts for growth to 1-2%.

The Congressional Budget Office has suggested municipal bankruptcies as the efficient way to handle these woes. The bond market response was not calculated but you can guess. Remember WWPS bonds when Washington State defaulted?

Caution: Since March 2009, the S&P500 has out performed gold by more than 50%. If gold can decline in spite of the Fed, so can stocks. Let’s not forget that in the last two years the US Dollar has twice spiked upward with corresponding damage to stocks.

Major brokerage firm strategists are in lock step with a 2011 forecast of higher stock prices. As measured by declining volatility (VIXS) institutional managers are as bullish as they were at previous market tops. These are contrarian indicators.

Due to out of date asset allocation models, investors have over emphasized domestic equities for decades ignoring the changing inter-relationships of markets. Investment opportunities exist elsewhere with better demographics and better government finances. The trends of prices in various markets act as a guide to shift portfolio allocations in the face of domestic market corrections.

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflations… Deficit spending is simply a scheme for the “hidden” confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.” – Alan Greenspan, Gold & Economic Freedom, 1968

Bullishness on gold ended abruptly two weeks ago. It still persists among the believers and hawkers, but it does not do well when real interest rates are rising as they have been since November. As mentioned above, the US Dollar is strengthening which is, also, negative for gold.

Every household and business owner knows there is a limit to the amount of debt that can be safely managed. According to data from the U.S Treasury and the Peter J. Peterson Foundation, publicly held debt and accrued interest has grown from $3.6T in 2002 to $7.9T in 2009. Current and unfunded liabilities have grown from $26.5T to $62.3T! This is more than $200,000 for every man, woman and child in the U.S! It’s no wonder investors feel that we are not out of the woods with this economic crisis.

The Federal Reserve has now surpassed Mainland China as the largest holder of US obligations. China is now second with Japan a very close third.

MASS MEDIA: The economy is recovering and employment is growing.

FACT: Employment in 2007 was 146 million. In 2010 employment is 138.9 million. Media spin is the loss of one million jobs. The 6 million who have quit looking for work are no longer counted as unemployed. If everyone desirous of work was counted, the unemployment rate would be 23%. 17% of the workforce is surviving on part-time jobs or unemployment benefits.

MASS MEDIA: Consumers are deleveraging, saving and using cash for purchases. FACT: Consumers are paying off debt while private wages have declined $213 billion since 2008Q1. Personal incomes, however, have risen from two major sources. First, government payrolls have increased $58B and entitlement transfers have increased $523B in the same time frame by expanding unemployment and other wealth transfer programs. Our federal government has  placed a bet with borrowed money that our personal consumption will increase.

FACT: Savings has increased almost 20% from 2008Q2 to 5.8%. This has been possible by the Fed borrowing money from the Chinese and giving it to consumers to spend. Without China’s generosity, the savings rate would be 1.2%.

FACT: Household deleveraging is the largest decline of debt on record. Some is voluntary exercising self-discipline with household finances. Some is involuntary as homes are foreclosed. Both are long-term economic drags.

MASS MEDIA: Retailers are doing fantastic as consumers increase spending. FACT: You can’t spend and save the same dollar. Seasonal sales are forecast to be the largest increase since 2006 with even more in 2011. Retail sales tracked by the Census Bureau have declined $100M since 2007 to $4.4T. Adjusted for the government’s CPI, sales should be $4.9T. Adjusted for real inflation, sales should be $5.4T. “If you drive around with your eyes open, you would think the hot new retailer in America is called SPACE AVAILABLE.”

FACT: Our largest electronics chain, Best Buy, was hammered on Black Friday as WalMart, Target and other retailers discounted inventory. Buyers responded leaving Best Buy with unsold inventory and a 1% decline in revenue on the biggest shopping day of the year. Price was the determining factor. Best Buy’s management is in denial. This was deflationary pressure at work in the market place – a consumer benefit – a government’s greatest fear.

“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.