2010Feb14 Week In Review
2010Feb14 Week In Review
February 14, 2010
WEEK IN REVIEW:
Recently, the US Dollar has been strengthening and gold prices falling. Gold has not been falling in isolation. Many commodity prices have been dominated by sellers this past month along with equity markets.
While the first 5 weeks of 2010 weren't quite as bad as 2008, they have left the primary equity benchmarks further in the red than they were at the same point in 2009, and we can all remember the tension that existed then. This year began innocently enough with many areas hitting new rally highs in the first few weeks, but since the 22nd of January we’ve seen a steady progression of negative technical developments for the equity markets in general.
Our commitment to Dynamic Asset Allocation (DAA) is driven by prices. Prices are not debatable. They are what they are each and every day. While not a futile exercise, fundamental analysis has many nuances subject to opinion and interpretation. Prices are always objective. An increasing number of stocks have been reversing from bullish to bearish trends in both domestic and international markets. The cumulative impact of the reversals removed international assets from our DAA on February 4th.
Cash is a safe haven while prices are trending lower. Normally, bonds are an attractive parking place for capital preservation. However, the short-term interest rate picture has major drawbacks. Foreign bonds, attractive last year, are now suffering from a stronger US dollar. Of 91 fixed income Exchange Traded Funds (ETFs), only nine have reasonable technical scores. Generally, bonds have been out of favor in our DAA which has been confirmed by the recent rise in Treasury rates – a negative for bonds.
While prices are not a forecasting tool, they are what matters in tracking trends. To look forward, we need to anticipate an improvement in business conditions that may or may not occur. We do know that removing the financial and construction industries from employment data that employment is improving. It does not tell us how or when those two industries will begin hiring. In our opinion, the construction industry is in long-term contraction. Retraining in new skills will be necessary to leave the unemployment roles.
The only legislative proposals in Congress are detrimental to private sector job growth. Without private sector job growth, Congressional estimates for federal revenue will be overly optimistic generating greater than forecast deficits. More federal employees can help the appearance of economic progress but no federal employee pays enough in taxes to cover the cost of being hired.
Consumer sentiment fell further in January when a rise was expected. Why? Perhaps it is because:
(1) 40% of American STRONGLY DISAPPROVE of the way President Obama is performing.
(2) While the U.S. unemployment edged downward in January, consumers still appear wary about the labor pool.
(3) Those with a job are worried about being laid off.
(4) For most consumers paying down debt remains their priority.
(5) Most consumers are focusing on needs over wants.
(6) 3, 4 and 5 suggest that most consumers are not yet comfortable with their financial standing.
(7) The market’s decline at the end of January appears to have rattled investor confidence this month.
(8) 25-30% of consumers are underwater with their mortgages with more to come.
(9) This winter’s severity has reduced economic activity.
There is no correlation between consumer sentiment and equity prices, but there is clearly a reluctance to spend money. At both the consumer and business level, that reluctance impedes recovery. Austerity is increasingly the new paradigm for households and businesses. It is slowly being forced upon governments at home and abroad.
In the EU, Greece is being forced to adopt very stringent federal budgets over the next several years to reduce its deficits. Greek austerity is being met with strong opposition from its largest labor sector, government employees. In New Jersey, Governor Chris Christie has frozen spending and made budget cuts due to a lack of revenue. This has raised the ire of all affected staff and agencies that are being forced to face reality in a changing economy.
The majority of the “jobs bills” has been money for states to pay normal operating expenses deferring the need to look realistically at declining revenues and inherent reductions similar to those in New Jersey. Certainly, the Federal Budget has not been adjusted. Next year’s forecast tax revenue is $2.5 Trillion with a “frugal” spending plan of $3.8 Trillion. It is more borrowed money from China and India that allows our Congress to pretend everything is still OK. It is debt that will undermine the lifestyle and opportunities of our children and grandchildren.
The recession and high unemployment have accelerated retirement among Boomers. Social Security is now running an annual deficit years earlier than previously assumed. There is no Congressional plan to fix this other than increasing taxes on the remaining and increasingly fewer workers. That is not a road to economic recovery.
The EU15 share of world GDP has been in declining since 1970, and the trend is expected to continue for decades according to the international macroeconomic database of the USDA. Asia’s increasing prosperity will become the dominant generator of GDP over the same time period. This is positive for US exporters.
What is the impact of all this on portfolios? Well, we have opinions, but they are subjective and could be wrong. Our Dynamic Asset Allocation (DAA) commitment is agnostic. Unlike Modern Portfolio Theory (MPT) with assets anchored in a portfolio regardless of economic conditions, DAA examines the universe of ETFs daily in search of asset classes attracting buyers. Where there are buyers, prices rise. It is a supply and demand market place.
Of six major asset classes, bonds, cash, currencies, commodities, US or international equities, we do not know in advance which will become the next area favored by global investors. Currently, cash and U.S. equities are the two strongest asset classes with equities weakening. We are prepared to commit portfolio reserves when a positive trend can be identified.
We have completely changed the front page of our web site to more accurately reflect our view of investing in today’s markets. For more information on adopting risk adjusting strategies, reply to this email or call 800-317-9119.
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