2009Oct4 Week In Review

Article Posted! Watering Down Profits

 

This week's radio broadcast of the Don Creech Show has been posted to www.DonCreech.com. Don and Perry discussed retirement issues and the past week’s stock market. In the final segment, our monthly subject of taxes is addressed by Todd Damish of Southard, Beckham, Atwater and Berry, CPA PS.

 

October 4, 2009

WEEK IN REVIEW:

 

The G20 met last week and included emerging market representatives legitimizing their importance in the global economy and creating some expectations that the emerging market economies will follow the economic reforms of the larger trading partners. The agreements, however, are largely implemented on a voluntary basis subject to local law makers providing the framework for enhancing each nation’s financial stability.

 

The global market is still subject to any one country deciding for protectionism and independently dealing with exchange rates. While coordination in a large group is more difficult than at the former G7 and G8 conferences, the G20 remains committed to the promotion of economic recovery by maintaining current policies for some time to come.

 

Consensus was reached on reducing the intervention by central banks into the financial markets. A time table to withdraw the capital that the Fed has used to prop up our banking institutions is still unspecified. However, the Fed has announced plans to slow and reduce its purchase of Treasuries, mortgage backed securities and agency debt. What is certain is that the Fed does not want to act prematurely and create a new or extended economic contraction. The Bank of England is following a similar path. In this environment, inflationary fears remain subdued.

 

As volatility in financial institutions has eased, so have interest rates creating additional value for corporate, high yield and municipal bond investors. Purchasers buying Treasuries last fall and spring typically paid too much for the appearance of safety. The fixed income market has recently shifted to favor the longer term securities.

 

The “New Normal” continues with lower consumer and business spending than last year. Equities have ignored the lower sales figures for the better profits that have come from reductions in staffing, inventories and leased space.

 

Equities, both domestic and international, continue to outperform commodities, currencies, fixed income and cash asset classes. As we begin a new quarter, the favorable trend for small company stocks over large companies continues. Small companies are able to respond faster in changing marketplace environments and have an easier time serving niche markets.

 

With the recent advance in stock prices, it is still possible to enter the market with care given to limiting losses quickly. While very little of the stimulus bill has been spent so far, it seems that equity investors believe more will enter our economy bringing profitability back to many businesses. We remain skeptical of the assumption but cannot deny that current price trends can remain in place longer in spite of fundamentals that suggest otherwise.