2010Nov14 Week In Review
"Prices are important not because money is considered paramount but because prices are a fast and effective conveyor of information through a vast society in which fragmented knowledge must be coordinated."
-- Thomas Sowell
Economy:
The Chicago Climate Exchange has collapsed. Originally estimating an annual global market of $10 trillion, profits are hard to find when carbon credits have fallen from $7 per ton in 2008 to ten cents. Consumers have been saved from extra taxation and the increased overhead of paying for a bookkeeping scheme. Exchange founder, Richard Sandor, benefitted from selling his interest for a cool $98.5 million leaving the two largest investors holding the bag – Goldman Sachs and Al Gore’s Generation Investment Management.
Morgan Stanley’s Business Confidence Index (MSBCI) continues recording improvement in all of the underlying indices it tracks. Hiring plans continue a positive trend of anticipated increases in payroll for the next quarter. Eighty percent of respondents indicated earnings had improved or been constant over the past year. Further, nearly 60% reported better margins. Anticipated capital expenditures have climbed back to January 2008 levels with more than half of the firms indicating it will be reflected in higher dividends, stock repurchases or merger and acquisitions.
States have been in denial for the past two years about the impact of the recession on revenues. We have repeatedly warned of big budget cuts coming. New Jersey voters have supported Governor Christie’s aggressiveness to return stability to the state’s finances. Texas, facing a $25 billion deficit, is now joining the slowly growing chorus of austerity seekers. The new national health care law mandates a relaxation of Medicaid eligibility requirements while phasing out federal funding. Opting out of Medicaid for a state run program is receiving serious consideration by the Texas legislature. We would not be surprised to see more states closely examine the bevy of unfunded mandates and conclude continuing participation is unaffordable.
The G-20 meetings ended on not-so-friendly terms as major trading partners were vocal in their opposition to President’s Obama’s economic policy. Brazil, China, Germany and Great Britain collectively opposed the Administration’s lack of fiscal restraint.
South Korea did not find benefit in the proposed trade agreement intended to protect American jobs. Timothy Geithner challenged Former Fed Chairman Greenspan’s negative comments on the Administrations current policy of weakening the US Dollar.
The Washington Post article, “Five myths about the Federal Reserve” is too much to cover here but worth reading. The myths are:
1. By printing money, the Fed will create runaway inflation.
2. The Fed is endangering the global recovery by trying to drive down the dollar.
3. The Fed is trying to finance the government's profligacy.
4. The Fed is immune to politics.
5. Bernanke knows what he's doing.
Inflation has been held in check by deleveraging. There is more private debt at risk of default than most analysts understand. The process of unwinding the cheap and excessive borrowing of the last decade requires more time.
Though weak, the economy is gradually gaining strength, but this is not a return to levels of growth we took for granted in the past three decades. Unwinding the excesses of the last decade cannot happen quickly when the government is intervening to reverse a natural economic reaction. Young job seekers will become entrepreneurs out of necessity. Surplus labor will continue pressuring household income levels which have declined over the past decade.
Real Estate:
Quantitative easing will create a plateau in real estate prices but the primary effect will be a delay in needed foreclosures. The amount of foreclosed property that is for sale is fairly small compared to the properties that are delinquent and headed to foreclosure in the next 18 months.
Demography dictates the number of potential buyers for real estate. That factor is negative as the Boomers retire, downsize or shed unaffordable extra homes. Their children, the X-Gen, are too few in number to consume the available housing. Combined with demography is poor work force growth and shrinking household income. Residential prices in most markets still have more to shed.
A shrinking work force is negative for commercial real estate. Businesses are reducing store size to cut both inventory and personnel. Those actions allow continuing operations to be profitable but at a cost to the community at large.
Stock Market:
While we have not seen any changes in leadership with respect to broad asset classes, we have seen some jockeying for position among our primary asset classes. International Equities have surpassed Domestic Equities as the primary asset class with Domestic Equities in the number two position. This shift is due to the strength of International Equities. Additionally, the Commodity asset class continues to improve at the expense of Fixed Income and Foreign Currency.
The market is certainly fickle, and this week was no exception with the S&P-500 declining 2.17%. However, consumers are apparently coming out of hibernation if Deutsche Bank’s data on vehicle sales is an indicator of future growth. The Consumer Discretionary SPDR exchange traded fund (XLY) seems to confirm the Bank’s opinion. The Fed disagrees which is why another round of easing is scheduled.
Consumer Metrics’ data on retail sales has been more pessimistic. At last week’s demographic conference, the apparent disconnect was discussed. Internet sales reflect consumption by younger people whose income and purchase are not yet large enough to be strong drivers for the economy. However, as retailers downsize inventory, Boomers have to use the Internet for needs such as phone batteries and items for household maintenance no longer available at their favorite retailer.
Investors continue to ignore equities in favor of fixed income in spite of the 18 month long rally they have witnessed.
Generally, investors neither recognize the importance of equities within their portfolios nor the value and potential in equities today especially compared to the risks now in the bond market. Flexibility within portfolios and in asset allocation is required to profit in today’s global economy and declining US Dollar.
“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.
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