2010Oct3 Week In Review
The maven of Nebraska, Warren Buffet, announced last week what has been obvious to most of the U.S. population: “I think we're in a recession until real per capita GDP gets back to where it was before." Analyzing the 70+ businesses he owns, the Burlington Northern Santa Fe has only recovered 61% from our recent economic trough. Other businesses have done less. His carpet business reduced staffing by 6,500 and requires more business before considering rehires. Since new home construction consumes new carpet, we remain pessimists about a near term recovery.
The International Monetary Fund reported global economic output for 2009 was the worst since 1944. However, global growth is expected to be 4.5% for this year. It will primarily be generated in emerging markets which, in 2008, had low sovereign debt and allowed failing businesses to fail rather than prop them up by mortgaging their countries’ futures. US GDP is expected to be nearer 2.5% this year and 1.2% for 2011. That is not enough growth to employ the new entrants into the job market from colleges and technical institutes. It is easy to understand why the NBER’s proclamation of the recession ending in June 2009 generates little optimism.
GE will be closing its incandescent bulb plant in Kentucky. CFL bulbs that meet low energy standards are made in China. Even Ohio based TCP, Inc. makes most of its energy efficient items in China. GE is, also, moving its Bloomington refrigerator production to Mabe, Mexico. Combined, GE is shedding nearly 1,000 jobs in the U.S.
Low inventories and available, though tighter, credit bode well for the auto industry as we move into 2011 according to Morgan Stanley analysts. The Administration must be hoping for this change to help in the IPO of the new-GM. After transferring GM’s bad debt to the U.S. Taxpayer, negating legal claims of creditors and pumping up the union’s pension and health plans, GM is financially stronger. (Imagine that!) Watch the IPO closely. We Taxpayers need $134 per share to get our money back. GM stock has never been as high as $134. We can hope.
Families are returning to formerly passé arrangements to manage falling incomes and unemployment. Adult children are increasingly returning home and delaying marriage. Siblings are living together. Elderly parents are moving in with adult children delaying of retirement or managed care centers. Any of these options reduces demand for the existing supply of housing sustaining downward pressure on prices. That remains a strong deflationary input for the economy.
Foreclosures accelerated home price declines in many regions. A slow down is underway as lenders are unable to prove their right to foreclose. In the frenzy to securitize loans into large pools for eager investors, the trustees often failed to “perfect the title” of the mortgaged property. Forged signatures by loan processors and unrecorded documents provide families in default with more time while the lenders try to locate documents proving their claim.
Resolution of conflicting claims will likely have a bad ending. Lenders with no proof have no claim. Borrows admitting to extended delinquency or out right default will have no right to possession. An option for the court will be to clear title and transfer to the local taxing authority, city or county. The property becomes a maintenance liability and generator of zero taxes. A sale at auction reduces comparable values with the neighbors petitioning for reassessments to lower their property taxes. That is a vicious cycle from which deflation continues its slow march into our future.
According to the traditional bell weather for inflation, U.S. Treasuries, inflation is not a problem. Interest rates are artificially low and likely to remain low until economic revival is evidence in the U.S. However, understanding “artificially” is important. The Fed is a newer, high volume purchaser of U.S. Treasuries. The Fed has unlimited funds as a buyer and has no concern over how low (or if no) interest is being paid.
Near zero interest is a benefit for Congress by reducing costs of borrowing below historic norms. It temporarily suppresses the future cost of debt rewarding fiscal irresponsibility. It is good for the declining number of persons or businesses that want to borrow. It is a huge detriment to retirees who need higher rates to supplement income and to investors where equities may be overvalued due to the artificially low rate environment.
Investors continue leaving equity funds for fixed income hoping to avoid volatility and uncertainty. Equity investors have recognized the more stable financial position of emerging market countries and the ability to participate in many commodity gains without the same risk of participating through the commodity exchange. Many imports from emerging market countries, such as coffee, steel, gold and silver, have been appreciating (read: inflation) attracting investor attention and dollars.
We expect global growth to remain stronger than in the U.S. or EU developed markets with problems similar to our. There are not enough foreign consumers controlling enough discretionary income to replace the now decelerating spending of the Boomers. Likewise, our collective social decision in the 70s to small families resulted in the X-generation being nine million smaller which lacks the mass to replace Boomer spending.
Our hope for change rests with the nearly 80 million Y-Gens who are just now entering the work force. With low living expenses and a poor job market, with untapped ingenuity and entrepreneurial activity from necessity, our future has great promise for more technological advancement and a continuing trend to greater environmentally focused activity.
Free capital flows not just from sector to sector but from country to country. Relative strength analysis helps identify changing trends and should be part of every portfolio’s on-going strategy. This is a new world in which “buy and hold” has lost its “efficient” advantage.
“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.