2010Oct24 Week In Review: the Mancession

"It is the highest impertinence and presumption, therefore, in kings and ministers to pretend to watch over the economy of private people, and to restrain their expense.... They are themselves always, and without any exception, the greatest spendthrifts in society. Let them look well after their own expense, and they may safely trust private people with theirs."
-- Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations [1776]

 

Economy:

 

Culturally, we like labels for greater clarification or to make events more memorable. The American Enterprise Institute has renamed our recession the Mancession. Women have retained employment more effectively than men reversing a five year trend. Since December 2007, 68.5% of job losses have been borne by men with unemployment now at 10.5%. Women’s unemployment rate is 8.6%.

 

High levels of employment are essential for a healthy, sustainable economy. For whatever reasons an employable, productive citizenry declines, dire consequences follow. For years we have been referring clients and prospects to Japan’s economy as illustrative of the economic impact of a society not having enough children. Now, Barclay’s Capital, together with the Japanese Cabinet and statistics department, has confirmed the connection between demographics and GDP.

 

With a decades-long low birth rate, Japan now faces of shortage of productive citizens to 1) care for an aging population and 2) generate sufficient tax revenue to support the government. From 2008 forward, changing demographics is expected to be an annual detriment to national GDP of 1%.

 

In spite of many unresolved domestic economic issues that we face, we are in the midst of another baby boom which will be a strong foundation for our future. Morgan Stanley’s Business Condition Index (MSBCI) is improving in its breadth and forward looking components. Strong profit reports this quarter are consistent with improving optimism in analysts’ expectations for the remainder of 2010 and into next year.

 

While the Fed continues debasing our Dollar, companies with foreign operations have benefitted with increasing bottom lines. If the Fed continues with QE2, consumer staples, information technology, materials, telecommunication and financials are sectors that should continue benefitting.

 

Health care:

 

The MSBCI reports fewer firms (but still 58%) are as concerned about the negative impact of health care costs. This may be due to political changes expected in November. It may be that the analysts are looking at publicly traded companies and not the small businesses that provide most of our employment.

 

Real Estate:

 

Price increases from the home buyer tax credit are rapidly vanishing. Last Monday on the national Mike Siegel Show, we interviewed Harry Dent whose forecast for prices is a continuing decline into 2012. (Interview starts @ 14 minutes). The Home Data Index reports the most severe decline since March 2009 with a continuing downward bias.

 

Stock Market:

 

Many political arrows have been thrown this year at corporations for hoarding cash that “should be spent creating jobs.” Besides illustrating a poor understanding of economics, the actual claims can’t be reconciled to the facts. Among the top 50 U.S. companies, total debt is greater than cash reserves. Further, large cash hoards are concentrated in six companies, five of which are the “too big to fail” banks to which we taxpayers have made a significant contribution to their cash accounts.

Multinationals do have a pot full of cash overseas that congress would like to tax. That is short sighted and a one time event. Cisco’s CEO, John Chambers, has been explaining to various forums that most of the countries in which they operate have a radically different tax policy than here.

 

Repatriating profits to the U.S. incurs a 35% tax. Expanding operations internationally benefits stockholders by having more working capital. Most foreign governments encourage repatriation of profits with tax rates of ZERO to 2%. Mr. Chambers is not alone in believing that a change in U.S. corporate tax policy could create up to a trillion dollar stimulus of real construction and real jobs without indebting future generations.

 

Our observations of relative strength in the markets continue to favor domestic and international equities with a bias to international due to the Dollar’s negative trend. Commodities continue building strength as seen in corn, cotton, copper, gold, silver and rare metals. We have added some exposure through emerging market exchange traded fund in our portfolios.

 

“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.