2010Dec 5 Week In Review: Demographics or Fed Policy?

“The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery. "
-- Winston Churchill

 

Economy:

 

The National Retail Federation estimates that total consumer spending reached $45 billion during the three days following Thanksgiving. Shoppers spent an average of $365.34, an increase from last year. The buying continued on “Cyber Monday.” Estimates are that online sales topped the $1 billion mark for the first time ever with e-commerce sales rising 16% from last year. Several reports said traffic both at physical stores and online retailers was up.  

 

What these numbers don’t show is that holiday promotions started prior to Black Friday. Many retailers offered door buster-type deals throughout November. Same-store sales at 28 retailers tracked by Thomson Reuters rose 6% in November, better than the expected 3.6%. The real test is profitability which won’t be known until next February.

 

With official unemployment jumping to 9.8%, it seems illogical that the increased spending is due to the current 8.8 million unemployment checks in our economy. With 15 million unemployed, the recently reported increase of 39,000 jobs is statistically indistinguishable from a decline. Unemployment data continues raising doubts about the strength of our recovery. We need economic growth above 2% to have job creation that would solve this problem.

 

The demographic cards were dealt decades ago limiting the number of households in the spending stage of life. All levels of government are waiting for better tax revenues and are hoping that Chairman Bernanke’s apparently unlimited monetary expansion will create resurging consumption. We expect demographics to triumph over Fed policy.

 

Relying on government data to analyze economic health or forecast portfolio returns is fraught with risk. U.S. GDP numbers were recently revised downward for the past three years. A persistent misrepresentation of similar financial information by a publicly traded company would have serious repercussions with investors and the SEC. Bureaucracies tend to be isolated from real world feedback.

 

Bureaucrats manage data to improve the appearance our country’s financial and operating condition. For instance, Chairman Bernanke’s primary concern is returning inflation to a tolerable range of 1 to 2% thereby avoiding our present deflationary trajectory. For example, various administrations have changed the basket of goods used to calculate inflation (CPI). Using the 1980 basket of goods, inflation would be 8.5%. Likewise, “unemployment” has been redefined by the federal government. Using 1994 definitions, unemployment exceeds 20%.

 

Stock Market:

 

After dipping in early November, bullish sentiment among individual investors has rebounded with the advancing stock market. It has now been three months since bullish sentiment was below its long-term average. Historically, such prolonged optimism points to an overbought condition in the markets. Short-term profit taking is not unexpected.

Fear often replaces reason with investors. Investors, lacking an understanding of real return, continue piling into bond funds. Bond investors have historically failed to demand a return that adequately offset inflation risks. Recently published data suggests any interest rate below 6% results in a negative return after inflation over even modest time periods. Additional adjustments are needed for the impact of taxes.

 

Using relative strength as a guide, Quality Fixed Income continues lagging equity alternatives. In spite of recent weakness, Emerging Markets remain the dominant asset class leading the Small Cap arena. REITs, Mid Cap and Sector Funds follow and continue providing better returns than Large Cap Equities. Index investors are better served by using an equal weighted index over the more commonly used S&P-500.

 

 

“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.