2010Sep26 Week In Review
Governments’ use of debt is nothing new. Injudicious use of debt creates problems for a government just as it does for poorly managed businesses and households. There is a very long-term cycle in economies that mismanage debt due to bureaucrats trying to avoid painful decisions and political repercussions. Illustrated as a clock, we need to remember that Japan has spent more than two decades to move to their current position from where the U.S.A. is now positioned.
The fed’s comments this week did not use the word “deflation.” However, its statement that inflation is below the Fed’s target could be interpreted that way. Several charts from the St. Louis Fed provide insight to our economy and the Fed’s concerns. Bank credit of all commercial banks has been declining since late 2008. Likewise, similar declines exist in commercial and industrial loans at all commercial banks though a levelling off has occurred recently. Commercial property loans requiring “special servicing” are at an all time high.
Total consumer credit outstanding has been declining since early 2009 after 65 years of increase. However, Consumer Metric’s data shows a slowing in the rate of decline indicating some possible relief is ahead of us.
Gold continues upward price momentum toward a two and a half year old forecast of $1,500. Instead of an inflation hedge, gold has become an anti-currency investment. Facing the combination of sovereign debt uncertainties and the continued devaluation of major currencies, investors have turned to the king of precious metals.
In a previous week’s commentary, we addressed some of the risks associated with purchasing the exchange traded fund, GLD, a major vehicle for gold investors. Given the disclosures in the GLD prospectus, we would consider it speculation rather than an investment. For details, use the link provided.
A secondary caution for investors is that gains from selling gold in its metal form or in its securitized form are subject to a 28% tax rather than lower capital gains rate. Our ETF portfolios have exposure to gold through companies or countries which avoids the punitive “gold tax.”
At the end of the quarter, institutional managers have to “clean up” their portfolios so positions held will align with investor expectations. Combined with option expirations, Friday’s stock market ended with a positive outcome for the week.
While the NBER announced that last June was the end of the recession, the persistently high unemployment, waning tax revenues and growing federal debt undermine the public’s confidence in the proclamation. It is no surprise to find the past few years being relabeled “The Great Disappointment.” On Saturday’s radio program, we discussed ten companies that could be early indicators of economic recovery.
This week we were guest hosts on the nationally broadcast Mike Siegel Show. Thursday we interviewed Kenneth Gronbach, author of The Age Curve. He has a very optimistic view of America’s ability to recover from the recent morass due to large numbers of the Y-Gen moving into their working and family formation years. Y-Gen males are coming out of technical institutes replacing retiring Boomers in the trades where they will be able to generate “livable wages” and be part of America’s great middle class. Ken will be with us next Saturday. You can listen on line at 9 AM Pacific.
We will be guest hosting the Mike Siegel Show Tuesday through Friday this week. You can find a local station or listen on line at 2 and 6 PM, Pacific.
Analysts at Morgan Stanley believe economic recovery has begun and will surpass recently lowered expectations. Resolution of uncertainties surrounding income tax increases effective January 1st would create some confirmation that the Administration and Fed were working together for economic growth. In addition, aligning our corporate tax rates to more closely match our global partners could repatriate corporate capital for domestic reinvestment creating real job growth. Investor response to any progress in these areas would likely have a positive impact on the markets.
Fundamental investment analysis is a traditional and well established methodology for selecting stocks. Many investors use resources such as those available from the American Association of Individual Investors to learn and examine data and business models. However, relative strength can often identify winners and losers without use of the fundamental data. Application of relative strength, also, segregates market leadership in sectors and countries. It is not static and requires monitoring as in any other investment discipline.
“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?
If you would like a free relative strength analysis of your portfolio’s sectors and positions, call us at 800-317-9119 begin_of_the_skype_highlighting 800-317-9119 end_of_the_skype_highlighting.