2009Dec27 Week In Review

As we prepare for a new decade, even signs of a slow recovery are now being doubted. Congress does understand that they can direct behavior by giving away money. Whenever you bribe someone to do anything, you can expect more of it. It was true with the Cash for Clunkers. Car sales increased, and then they fell back to reality.

 

One of the traditional underpinnings of a growing economy has been new home sales which were improving due to Congressional wealth transfer regulations – taxing everyone to give money to first time home buyers.

 

On Christmas Eve, the Wall Street Journal reported:

 

Sales of newly built homes fell 11.3% in November to a seven-month low, the Commerce Department reported, as the government's tax credit for first-time buyers was originally set to expire. "The housing rebound has so far been largely supported by government programs, raising questions of sustainability as these programs come to an end next year," said BNP Paribas economist Anna Piretti.

 

Shazaam! When the bribe ends, so does the desired outcome.

 

What looks like a bottom in the residential real estate pricing is merely the eye of the hurricane. From now and through 2011, Alt-A and Option-ARM loans are due for payment and interest rate reset. A very high percentage of these loans have only had minimum payments made during the initial term. The minimum payment was often less than the monthly interest charge resulting in an increasing mortgage balance every month.

 

Homeowners with these loans are facing payments that will double to quadruple with valuations likely to be less than the outstanding loan balance. Will they be able to handle the new payment? Even if they can, will they be better off financially to abandon the property, rent and take a few years to rebuild their credit? If not for the social stigma of a foreclosure, an objective view of a family’s financial future may support that decision. Further, the social stigma decreases with the increasing number of people who have gone before you.

 

As for corporate America, reaping profits this year has been very challenging as consumers have had greater expectations of discount pricing than retailers have seen in decades. Black Friday, the day after Thanksgiving, is traditionally the day corporate America finally operates in “the black” for the year. Not so much, this year.

 

As for Christmas spending, Bloomberg.com reports:

 

Target Corp. and U.S. retailers may lose almost $9 billion in holiday sales as banks rein in lending to cash-strapped consumers before a new credit-card law takes effect.  Sales in November and December may fall 1.2 percent to $436.7 billion from the same period in 2008, said Britt Beemer, chairman of consumer polling firm America’s Research Group. If lenders weren’t cutting customer spending limits and rejecting more credit-card applicants, sales would gain about 0.8 percent to $445.5 billion, he said in a Dec. 21 interview.

 

As we prepare for a new year, our investing focus needs to be shortened from long-term averages to what is currently happening in the daily auction between buyers and sellers. Virtually everyone has an opinion about what should happen in the markets next year.

 

On any given day, only one of two things occurs with every security. Either there are more buyers acquiring a security or there are more sellers unloading it. When buyers dominate, prices rise. When sellers dominate, prices fall. Benjamin Graham is best known for his process of establishing the “value” of a company’s stock. What is less well known is that he used point and figure charts (PnF) for tracking stocks and determining entry and exit points. 

 

We are increasingly relying on PnF for portfolio decisions using exchange traded funds and evaluating existing stock positions. The PnF work has been applied to our 401k evaluations that have been posted to our web site. PnF has illustrated that portfolios can be self adjusting to changes in market risk. Select any company listed on our 401k Strategy tab and drill down into subsequent pages to see how the PnF process alerted participants to the increasing market risk in 2008 and the opportunities that came in 2009.