Contents: Overview; Tea leaf readings; Economic reports; Perspective, “Unemployment rates and the markets”
“Labour was the first price, the original purchase, the money that was paid for all things. It was not by gold or by silver, but by labour, that all wealth of the world was originally purchased.” - Adam Smith (1723-1790) Scottish Political Economist
Overview
The markets had a nice week, with all three major indexes adding at least 3.2%. Some major mergers, i.e., Stanley Works and Black & Decker, a $44 billion takeover of one of the country’s major railroads by Warren Buffett – calling it “a bet on the country” –analyst upgrades of industry leaders GE, Macy’s, Amazon and Traveler’s and productivity jumping at fantastic rates all combined to overcome the announcement on Friday that the national unemployment rate had moved up to 10.2%. (I’ll address that in the Perspectives section.)
If you read the Tea Leaf comments and add to them the data that is showing up in the Economic reports, I truly believe you have to be very positive about the trend of both the markets and the economy, in general.
I understand that for many people – in light of the seemingly never-ending fear mongering and negative spin put on by many pundits and media outlets – it’s hard not to succumb to that stuff. Let me defer to the ever-understated “Whispering Jim” Cramer for a summation. He says, “Watch out for the constant drumbeat of negativity. The bear’s comments since the March lows have been the biggest money-losing strategies ever.”
I don’t always agree with him. He is spot on here, however. You invest for your future – not the past…
Tea Leaf Readings
(I use this term to describe quotes from a number of opinion leaders about current market and economic events – what they see happening now and their expectations.)
"I read it (the unemployment report) as a relatively constructive number, because the trend continues to improve. The headline number of course will keep consumer confidence under pressure, but I'm not that hopeful that the consumer is going to make a big contribution to this recovery anyway. I do think we're in the early stages of a global recovery, but I think it's going to be led by the business community, not by the consumer, and so this does nothing to change that point of view." - David Joy, chief market strategist, RiverSource Investors (I agree with the biz lead recovery…)
“On the one hand, we show that stock returns over the past 40 years were virtually in line with the long-term historical average. On the other hand, bond returns were not only much higher than their historical averages but were also higher than their current yields. This high bond return is due to higher interest rates in the 1970s and a subsequent declining-interest-rate environment. This scenario for bonds is very unlikely to repeat in the future, given today’s low-interest-rate environment. Investors who hope bonds will outperform stocks in the coming years will likely be disappointed.” – Roger G. Ibbotson, finance professor, expert on capital market returns, Yale School of Management
“Historically there is little or no correlation between the price of gold and stock markets. Over the past 10 years, the correlation between gold prices and the S&P 500 index was 0.01--that is, virtually no correlation. Over the past year, that correlation was about 0.25, which is still minuscule.
However, indirectly, if strengthening gold prices in tandem with an ever-weakening dollar leads to significant inflation, then that would clearly have negative implications for the stock market. Keep in mind that on an inflation-adjusted basis, gold reached an all-time high of almost $2,300 an ounce in January 1980. So, even if gold doubled in price now, it would still fall below that peak.” - Paul Wigdor, president, Superfund USA Inc., a broker-dealer offering managed futures funds denominated in the dollar and in gold
"We remain constructive on the nascent recovery but skeptical about broad market valuations in both equities and in the commodities space...as central banks deploy exit strategies. An increase in volatility should as usual bring both risks and opportunities for the quick and the steady. Traders, stock pickers and buyers on dips should benefit as things progress." - John Stoltzfus, analyst, Ticonderoga Securities
"There will be a good chance we will look back to see that Q3 was in fact the bottom, that Q4 was the tipping point and the recovery started aggressively in Q1 of fiscal '10." - John Chambers, CEO, Cisco
“We’ve actually seen more good news than bad across a broad spectrum of economic data. We look at the initial jobless claims as another piece of economic data we’re pretty happy with. The most important thing is the non-farm productivity number.” - Art Hogan, chief market analyst, Jefferies & Co.
Since 1930, (which is as far back as the Commerce Department's GDP numbers go), the NY Yankees have been a harbinger of average of 5% GDP growth in years following a series victory, healthy by any measure. In years in which the Yankees didn't win the World Series (either they lost or didn't make it) U.S. output expanded at an unspectacular 2.9%.
Economic reports from the past week (with occasional comments…)
Wall Street analysts are forecasting S&P 500 earnings will increase 25% in 2010, the fastest growth in two decades. Investors are paying the lowest so-called price-to-earnings growth ratios since 1995. - Bloomberg
The US manufacturing sector grew in October for the third consecutive month and at a faster rate than was expected. The October reading was the highest since April, 2006. - The Institute for Supply Management
US construction spending made its largest gain in a year in September and home building rose 3.9 %, its largest gain since rising 4.2% in July 2003. – US Commerce Department
The Pending Home Sales Index, based on contracts signed in September, rose to the highest level since December 2006. It was the eighth straight monthly rise in the index, the longest streak since the measurement started in 2001. - The National Association of Realtors
First-time homebuyers, along with buyers who have owned their current homes at least five years would be eligible for extended and expanded tax credits. First-time homebuyers -- or anyone who hasn't owned a home in the last three years -- would still get up to $8,000. Buyers who have owned their current homes at least five years would be eligible for tax credits of up to $6,500. To qualify, buyers in both groups have to sign a purchase agreement by April 30, 2010, and close by June 30. These credits are not likely to be extended beyond that time.
The Federal Reserve left interest rates near zero and slightly upgraded its reading of the economy. The central bank affirmed its plan to keep rates at a record low for an extended period in the face of still high unemployment and low inflation.
You have to go back almost 50 years to find two straight quarters where productivity, which is output per hour worked, has boomed as rapidly as it has in Q2/Q3 of 2009. Nonfarm businesses increased their output at a 4% annual rate in Q3 and they did this while cutting the number of hours worked at a 5% rate. – US Department of Labor
“There are increasingly strong signals that the world economy is in recovery, with a number of leading developed economies and China clearly in a growth phase. The composite leading indicator of economic activity in our 30-member states rose in September from August. Leading indicators…point strongly to growth in Italy, France, the United Kingdom and China, while tentative signals of expansion have emerged in Canada and Germany. A recovery is clearly visible in the United States, Japan and all other OECD economies and major non-OECD economies.” - The Organization for Economic Cooperation and Development
Perspective
“Unemployment and the markets”
Unemployment rose to 10.2% - the highest level since 1982. (For the record, unemployment at that time peaked at 10.8% - and held there for six months.) This is what the “nattering nabobs of negativity” focus on. (I don’t know who came up with that but it does flow nicely…) And it’s not good – no doubt about that. It’s a mental and fiscal drag for everyone. Here are some of the reasons the markets didn’t just crater on Friday when that number came out.
First, and not to be a smart guy, it wasn’t as if it was totally unexpected. Next, the unemployment index is the very last indicator that will turn positive in any recovery. That’s why it’s called a trailing indicator. Now, consider all the comments and data in the Tea Leaf and Econ sections. That stuff extrapolates trends of the future – not what’s already in the rearview mirror. Markets are totally forward-looking – unemployment numbers are totally backward looking.
Let’s analyze the report itself.
The number of jobs lost in October was much lower than had been the case in the months before. It is continuation of a trend of diminishing numbers of new filings over the past several months. Further, temp jobs — often a leading sign of overall job growth — have increased for the third month in a row. Typically, payroll numbers turn higher an average of four and a half months after the temp numbers begin to rise.
In addition, average hourly earnings are up at a 2.8% annual rate in the past three months, a slight acceleration from earlier this year. Productivity growth has been extremely rapid also. Over time, higher output with lower labor costs means more profits, which will help stimulate rapid job growth once companies become more confident about the durability of the economic recovery.
Finally, the ISM Manufacturing Index reported that its employment index increased by 6.9 points to 53.1. The 6.9 point increase tied the largest monthly gain since the huge economic recovery in the early 1980s – when we had a similar recession. The level of the index, significantly above 50, suggests payroll gains should start sometime in the next couple of months.
Bottom line is that, behind the gloomy headlines, the trends are already rapidly shifting to the positive. It won’t be long before even the most negative natterers will have to acknowledge that…
All my best,
Mike
As of 6 November 2009 /
Dow Jones 10,023 S&P500 1069 NASDAQ 2112 Oil $77.56/bbl Gold $1,096.80/oz
Monday, November 9, 2009
Monday, November 2, 2009
Market retrospective - week of 30 October 2009
Contents: Overview; Tea leaf readings; Economic reports; Perspective, “The dollar and commodities”
“The very liquidity of stock markets causes people to focus on price action. If you buy an apartment house, if you buy a farm, if you buy a McDonald’s franchise, you don’t think about what it’s going sell for tomorrow or next week, or next month - you think about how this business is going to do. But stocks, with this huge liquidity, suck people in and they turn what should be an advantage into a disadvantage. You are focusing on the right thing if you look at the stream of income that a stock asset is going to produce over time.”– Warren Buffett (1930 - ) investor
Overview
Last week, we hit 10,000 again. This week, we had the 80th anniversary of the start of the stock market crash in 1929. It was the start because it really didn’t happen all in one day – the real low wasn’t hit until almost three years later.
I thought it was interesting that on that same day, the third quarter GDP numbers were released, which were much higher than that ever popular consensus had expected. Kind of the yin and the yang, especially in view of so many having claimed that this is the worst time since then. As opposed to what happened after that 80 year ago date, it seems that we are on our way higher.
One other interesting note – you can see that I don’t get out much – is that after all the sound and fury of the past week, it did, in fact, signify nothing as the averages were just about exactly unchanged from last week’s close. Matter of fact, the month of October ended almost unchanged from the end of September.
Don’t get too focused on short-term data. As Mr. Buffett suggests, the stream of income – which comes over time – is your key to success. Go with trends – not sound bites.
Tea Leaf Readings
(I use this term to describe quotes from a number of opinion leaders about current market and economic events – what they see happening now and their expectations.)
"My own view is that this will be a business-led recovery, not only in terms of capital-spending investment, but also business-to-business transactions. Corporate cash flows are very strong and profits are improving. Economy-wide productivity is very high. And let’s not forget the Fed’s highly expansionary policies, with a zero target rate, a steep Treasury curve, and a growing balance sheet.” – Larry Kudlow, economist, Kudlow & Company (I think he is spot on with this one…)
“I believe equities will outperform corporate credit. People are underestimating the strength of the recovery. Growth will continue in the US as the unemployment rate is seen trending down by end 2009.” - Larry Kantor, global head of research, Barclays Capital
“For some investors, there still is a case of once bitten, twice shy. We do see a reluctance of people to get back into the market and people are tending to buy certainty of cash flow over uncertainty of equities. The rewards are wearing thin. The cost of certainty has become very high; with interest rates effectively at zero and the returns offered by Treasurys are not enough to live on. Unless you can’t afford to lose a dime, do not allocate a disproportionate amount of assets to this area.
I believe the economy has been in recovery mode since the first quarter. While there is still negativity out there, we think leaning against the skepticism is the right thing to do and recommend being modestly overweighted in equities.” - Paul Zemsky, head of the Multi-Asset Strategies and Solutions Group, ING Investment Management
“With our government continuing to provide cheap money to the market place to help finance the recovery, commodities are going to outperform other asset classes going forward. That said, the biggest risk factor for commodities over the next few months is the reallocation of money back into the dollar. If there is a major correction in the stock market, investors will look for safety in the dollar and that would be a caveat for the whole complex.Without that big switch in sentiment, the trends that we have seen over the six months will continue to play themselves out going forward.” - Adam Klopfenstein, senior market strategist at Lind-Waldock, division of MF Global
“The GDP broadly fits in the small positive sweet spot for risk. The figures are not too strong to bring forward rate hike expectations or too weak to encourage thoughts of the recovery faltering." - Alan Ruskin, international strategist, RBS
“The recovery has just started. The Dow’s move from 6,600 to 10,000 is giving us back what we should have had in the first place. I expect the Dow Industrials to hit 11,000 by the end of 2009 and 13,000 by the end of 2010. Through the next 14 months, there are a couple of sectors that are going to lead us through this recovery.
Financial services is one. Because it has been so beaten down with investors overreacting to the economic fallout, financials are better positioned than any other industry.
I also think the tech sector will be even better in 2010 than in 2009. Technology tends to do well when the global economy is doing well.” – Dr. Bob Froehlich, senior managing director, The Hartford
“Don’t focus on the housing and unemployment numbers. Those two things are lagging indicators and unfortunately, investors focus on those headline topics. This economy is starting to improve, things look a lot better than a lot of people anticipated and I think the market has quite a bit on the upside.” - Greg Merlino, president/founder, Ameriway Financial Services
Economic reports from the past week (with occasional comments…)
More US industries are experiencing an increase in demand and profits, a survey showed, further proof the economy started growing again in the third quarter. “The survey provides new evidence that the US recovery is under way," said William Strauss, a senior economist at the Federal Reserve Bank of Chicago and chairman of the NABE's industry survey committee.
In its latest industry survey, the National Association for Business Economics said the improved optimism had pushed its net rising index (NRI) for demand to 23 in the July-September quarter, the first time it had risen in five quarters.
Home prices in the 20 largest US cities rose in August for a third consecutive month, bolstering the case that an economic recovery is at hand. The S&P/Case-Shiller home-price index climbed 1% from the prior month on a seasonally adjusted basis after a 1.2% increase in July.
“After increasing for five months in a row, new home sales declined in September, coming in below consensus expectations. More aggressive pricing by sellers – a bullish sign –may have played a role in the slower pace of sales. The median price of new homes increased 2.5% in September, an unusually strong gain for this time of year. The average price of new homes increased 10.2%, the largest increase for any September on record, going back to 1975.
We believe the pace of sales will renew its upward trend very soon, regardless of whether Congress renews the homebuyer tax credit, as the fundamentals in the housing market are much improved. Prices on a national average basis are back near fair value and interest rates remain low by historical standards. Given demographic trends, we anticipate that over the next few years the annual pace of new home sales will climb from 402,000 in September to roughly 950,000.” – Brian S. Wesbury, chief economist, First Trust
In its first estimate of third-quarter economic activity, US gross domestic product (GDP) rose by a seasonally adjusted 3.5% annual rate from July through September. – Department of Commerce (This was the first growth in GDP since the second quarter of 2008 and is an “unofficial” confirmation that the recession has ended. The reason for the delay is that The National Bureau of Economic Research is responsible for determining when contractions “officially” begin and end. The head of the committee charged with making the call, said in August it may take more than a year for the group to reach a conclusion. (Don’t kill the job, I guess.)
The number of US workers filing new claims for jobless benefits dipped last week, while the number collecting long-term aid fell to the lowest reading in seven months as the job market steadied. – Department of Labor
Deutsche Bank AG boosted its estimates for US economic growth in the second half of 2009 and 2010, citing a “noticeable pickup in demand” following yesterday’s third-quarter report.
Gross domestic product growth estimates were raised to 4% in the fourth quarter, 4.5% in the first quarter of 2010, 3.5% in the second quarter, 3.7% in the third quarter and 3.8% in the fourth quarter. The previous forecasts were 2.5 %, 2.6%, 3.1%, 3.3% and 3.8%.
Perspective
“The dollar and commodities”
The dollar dropping forever is not a good thing. However, for now, it’s not altogether terrible. If nothing else, it’s helping US companies of all types and sizes do business overseas. Let’s look at some of the mechanics of what’s going on.
Whether a currency – anybody’s – is considered weak or strong is directly related to what return that currency provides compared with other currencies. So, since the prevailing interest rate here is, effectively, zero – the dollar is considered to be weak. Further, the dollar has a great influence on commodity prices since ALL commodities are priced in dollars.
We have the risk trade. Today, that means you sell (short) the dollar and buy commodities and companies in emerging markets. That’s done because with the dollar being weak, commodity prices keep rising and because the traders believe that the emerging markets are where the major growth will come from.
Then there’s something called the carry trade. This is a popular strategy in the foreign exchange markets. The traders buy the higher interest rate currencies while selling the ones with lower rates, i.e., the dollar.
Let’s consider a few specific commodities.
How about gold? According to Bill Gary, president of Commodity Information Systems Inc., “gold is particularly affected by the weakness of the dollar because it has always been viewed as a safe haven for catastrophes and depreciation of currencies.” Over time, it has provided a marginal return at best. Since it offers no dividends or interest, the only way you benefit is to “buy low, sell high.”
Oil is the prime example of how the dollar being weak has benefited commodity prices. There are still huge inventories globally and demand continues moderate, at best. The weak dollar and increasing demand from Asia and India can help keep prices high, even when the dollar strengthens.
Supply and demand is impacting soybeans more than the dollar. The crop has been a strong performer the last few months. However, huge yields are expected from both South America and the US next year. Even though that magic bean has many uses and Asian demand will likely remain high, seems that production looks bigger than demand.
Commodities are considered to be non-correlative to the stock market. In American, that means that, for the most part, if stocks are up, commods are down and vice versa, so it can be a great way to get your asset allocation in balance.
You can invest through stock in a commodity company, or one that has something to do with the production of a commodity, exchange traded funds or commodities (ETFs or ETCs), individual commodity futures, commodity mutual funds and managed futures funds. All have varying degrees of risk and investment requirements.The biggest risk factor for all commodities over the next few months is the reallocation of money back into the dollar. That can occur for two reasons.
First, if there is a major correction in the stock market, investors will look for safety in the dollar and that would be a caveat for the whole complex. I don’t think that’s hardly likely. The other is that the Fed actually increases our interest rates. That doesn’t look likely now until late 2010 at the earliest.
The bottom line…find what you’re most comfortable doing. Do your homework and understand that fluctuation can have a whole new meaning when it comes to commodity type investments.
All my best,
Mike
509-747-3323
Closing values as of 30 October 2009 /
Dow Jones 9712 S&P500 1036 NASDAQ 2045 Oil $77.12/bbl Gold $1,046.60/oz
“The very liquidity of stock markets causes people to focus on price action. If you buy an apartment house, if you buy a farm, if you buy a McDonald’s franchise, you don’t think about what it’s going sell for tomorrow or next week, or next month - you think about how this business is going to do. But stocks, with this huge liquidity, suck people in and they turn what should be an advantage into a disadvantage. You are focusing on the right thing if you look at the stream of income that a stock asset is going to produce over time.”– Warren Buffett (1930 - ) investor
Overview
Last week, we hit 10,000 again. This week, we had the 80th anniversary of the start of the stock market crash in 1929. It was the start because it really didn’t happen all in one day – the real low wasn’t hit until almost three years later.
I thought it was interesting that on that same day, the third quarter GDP numbers were released, which were much higher than that ever popular consensus had expected. Kind of the yin and the yang, especially in view of so many having claimed that this is the worst time since then. As opposed to what happened after that 80 year ago date, it seems that we are on our way higher.
One other interesting note – you can see that I don’t get out much – is that after all the sound and fury of the past week, it did, in fact, signify nothing as the averages were just about exactly unchanged from last week’s close. Matter of fact, the month of October ended almost unchanged from the end of September.
Don’t get too focused on short-term data. As Mr. Buffett suggests, the stream of income – which comes over time – is your key to success. Go with trends – not sound bites.
Tea Leaf Readings
(I use this term to describe quotes from a number of opinion leaders about current market and economic events – what they see happening now and their expectations.)
"My own view is that this will be a business-led recovery, not only in terms of capital-spending investment, but also business-to-business transactions. Corporate cash flows are very strong and profits are improving. Economy-wide productivity is very high. And let’s not forget the Fed’s highly expansionary policies, with a zero target rate, a steep Treasury curve, and a growing balance sheet.” – Larry Kudlow, economist, Kudlow & Company (I think he is spot on with this one…)
“I believe equities will outperform corporate credit. People are underestimating the strength of the recovery. Growth will continue in the US as the unemployment rate is seen trending down by end 2009.” - Larry Kantor, global head of research, Barclays Capital
“For some investors, there still is a case of once bitten, twice shy. We do see a reluctance of people to get back into the market and people are tending to buy certainty of cash flow over uncertainty of equities. The rewards are wearing thin. The cost of certainty has become very high; with interest rates effectively at zero and the returns offered by Treasurys are not enough to live on. Unless you can’t afford to lose a dime, do not allocate a disproportionate amount of assets to this area.
I believe the economy has been in recovery mode since the first quarter. While there is still negativity out there, we think leaning against the skepticism is the right thing to do and recommend being modestly overweighted in equities.” - Paul Zemsky, head of the Multi-Asset Strategies and Solutions Group, ING Investment Management
“With our government continuing to provide cheap money to the market place to help finance the recovery, commodities are going to outperform other asset classes going forward. That said, the biggest risk factor for commodities over the next few months is the reallocation of money back into the dollar. If there is a major correction in the stock market, investors will look for safety in the dollar and that would be a caveat for the whole complex.Without that big switch in sentiment, the trends that we have seen over the six months will continue to play themselves out going forward.” - Adam Klopfenstein, senior market strategist at Lind-Waldock, division of MF Global
“The GDP broadly fits in the small positive sweet spot for risk. The figures are not too strong to bring forward rate hike expectations or too weak to encourage thoughts of the recovery faltering." - Alan Ruskin, international strategist, RBS
“The recovery has just started. The Dow’s move from 6,600 to 10,000 is giving us back what we should have had in the first place. I expect the Dow Industrials to hit 11,000 by the end of 2009 and 13,000 by the end of 2010. Through the next 14 months, there are a couple of sectors that are going to lead us through this recovery.
Financial services is one. Because it has been so beaten down with investors overreacting to the economic fallout, financials are better positioned than any other industry.
I also think the tech sector will be even better in 2010 than in 2009. Technology tends to do well when the global economy is doing well.” – Dr. Bob Froehlich, senior managing director, The Hartford
“Don’t focus on the housing and unemployment numbers. Those two things are lagging indicators and unfortunately, investors focus on those headline topics. This economy is starting to improve, things look a lot better than a lot of people anticipated and I think the market has quite a bit on the upside.” - Greg Merlino, president/founder, Ameriway Financial Services
Economic reports from the past week (with occasional comments…)
More US industries are experiencing an increase in demand and profits, a survey showed, further proof the economy started growing again in the third quarter. “The survey provides new evidence that the US recovery is under way," said William Strauss, a senior economist at the Federal Reserve Bank of Chicago and chairman of the NABE's industry survey committee.
In its latest industry survey, the National Association for Business Economics said the improved optimism had pushed its net rising index (NRI) for demand to 23 in the July-September quarter, the first time it had risen in five quarters.
Home prices in the 20 largest US cities rose in August for a third consecutive month, bolstering the case that an economic recovery is at hand. The S&P/Case-Shiller home-price index climbed 1% from the prior month on a seasonally adjusted basis after a 1.2% increase in July.
“After increasing for five months in a row, new home sales declined in September, coming in below consensus expectations. More aggressive pricing by sellers – a bullish sign –may have played a role in the slower pace of sales. The median price of new homes increased 2.5% in September, an unusually strong gain for this time of year. The average price of new homes increased 10.2%, the largest increase for any September on record, going back to 1975.
We believe the pace of sales will renew its upward trend very soon, regardless of whether Congress renews the homebuyer tax credit, as the fundamentals in the housing market are much improved. Prices on a national average basis are back near fair value and interest rates remain low by historical standards. Given demographic trends, we anticipate that over the next few years the annual pace of new home sales will climb from 402,000 in September to roughly 950,000.” – Brian S. Wesbury, chief economist, First Trust
In its first estimate of third-quarter economic activity, US gross domestic product (GDP) rose by a seasonally adjusted 3.5% annual rate from July through September. – Department of Commerce (This was the first growth in GDP since the second quarter of 2008 and is an “unofficial” confirmation that the recession has ended. The reason for the delay is that The National Bureau of Economic Research is responsible for determining when contractions “officially” begin and end. The head of the committee charged with making the call, said in August it may take more than a year for the group to reach a conclusion. (Don’t kill the job, I guess.)
The number of US workers filing new claims for jobless benefits dipped last week, while the number collecting long-term aid fell to the lowest reading in seven months as the job market steadied. – Department of Labor
Deutsche Bank AG boosted its estimates for US economic growth in the second half of 2009 and 2010, citing a “noticeable pickup in demand” following yesterday’s third-quarter report.
Gross domestic product growth estimates were raised to 4% in the fourth quarter, 4.5% in the first quarter of 2010, 3.5% in the second quarter, 3.7% in the third quarter and 3.8% in the fourth quarter. The previous forecasts were 2.5 %, 2.6%, 3.1%, 3.3% and 3.8%.
Perspective
“The dollar and commodities”
The dollar dropping forever is not a good thing. However, for now, it’s not altogether terrible. If nothing else, it’s helping US companies of all types and sizes do business overseas. Let’s look at some of the mechanics of what’s going on.
Whether a currency – anybody’s – is considered weak or strong is directly related to what return that currency provides compared with other currencies. So, since the prevailing interest rate here is, effectively, zero – the dollar is considered to be weak. Further, the dollar has a great influence on commodity prices since ALL commodities are priced in dollars.
We have the risk trade. Today, that means you sell (short) the dollar and buy commodities and companies in emerging markets. That’s done because with the dollar being weak, commodity prices keep rising and because the traders believe that the emerging markets are where the major growth will come from.
Then there’s something called the carry trade. This is a popular strategy in the foreign exchange markets. The traders buy the higher interest rate currencies while selling the ones with lower rates, i.e., the dollar.
Let’s consider a few specific commodities.
How about gold? According to Bill Gary, president of Commodity Information Systems Inc., “gold is particularly affected by the weakness of the dollar because it has always been viewed as a safe haven for catastrophes and depreciation of currencies.” Over time, it has provided a marginal return at best. Since it offers no dividends or interest, the only way you benefit is to “buy low, sell high.”
Oil is the prime example of how the dollar being weak has benefited commodity prices. There are still huge inventories globally and demand continues moderate, at best. The weak dollar and increasing demand from Asia and India can help keep prices high, even when the dollar strengthens.
Supply and demand is impacting soybeans more than the dollar. The crop has been a strong performer the last few months. However, huge yields are expected from both South America and the US next year. Even though that magic bean has many uses and Asian demand will likely remain high, seems that production looks bigger than demand.
Commodities are considered to be non-correlative to the stock market. In American, that means that, for the most part, if stocks are up, commods are down and vice versa, so it can be a great way to get your asset allocation in balance.
You can invest through stock in a commodity company, or one that has something to do with the production of a commodity, exchange traded funds or commodities (ETFs or ETCs), individual commodity futures, commodity mutual funds and managed futures funds. All have varying degrees of risk and investment requirements.The biggest risk factor for all commodities over the next few months is the reallocation of money back into the dollar. That can occur for two reasons.
First, if there is a major correction in the stock market, investors will look for safety in the dollar and that would be a caveat for the whole complex. I don’t think that’s hardly likely. The other is that the Fed actually increases our interest rates. That doesn’t look likely now until late 2010 at the earliest.
The bottom line…find what you’re most comfortable doing. Do your homework and understand that fluctuation can have a whole new meaning when it comes to commodity type investments.
All my best,
Mike
509-747-3323
Closing values as of 30 October 2009 /
Dow Jones 9712 S&P500 1036 NASDAQ 2045 Oil $77.12/bbl Gold $1,046.60/oz
Monday, October 26, 2009
Market retrospective - week of 23 October 2009
Contents: Overview; Tea leaf readings; Economic reports; Perspective, “Halfway point”
"Business is always a struggle. There are always obstacles and competitors. There is never an open road, except the wide road that leads to failure. Every great success has always been achieved by fight. Every winner has scars.... The people who succeed are the efficient few. They are the few who have the ambition and will-power to develop themselves.” – Herbert N. Casson (1869 - 1951) Canadian author
Overview
Last week saw the markets hitting 10,000 again and, since this time it was on the upside, that was a good thing.
This week saw another milestone – the anniversary of the 1987 market crash on the 19th. As it happened, this October 19th saw the establishment of another new high for the year. October, 1987, made what’s happened recently look like a tea dance in comparison. The drop all happened in one day – none of this stretching it out over a few months. Of course, the media was all over themselves in a contest as to who could do the most dramatic wail and gnash job in professing the ending of the world as we knew it.
I have to admit, it was interesting to watch that day. You know how when you go to the gas station and when you’re filling your tank, the numbers just go whirring by? That’s exactly how the market average numbers looked on our computers – and they were going straight down. A similar percentage drop happening today would equate to a one day cratering of over 2000 points. An attention getter to be sure.
Here are two points from that. First, when it was going on, like now, no one – of course – knew how it would turn out. (Six months after the event, the averages had recovered back and were higher than they were on the 18th of October.) Additionally, like now, good companies didn’t become bad simply because their share prices dropped.
Conclusion? Bad events have happened to the markets and economy before and they will again. Having a strategy that includes high quality investments and holding to it – in spite of the pouting pundits of pessimism – will always ultimately stand you in good stead.
Tea Leaf Readings
(I use this term to describe quotes from a number of opinion leaders about current market and economic events – what they see happening now and their expectations.)
"It has been a lovely rally. I think right now is a beautiful time to take some money off the table and to really try to protect it rather than to go for broke by expecting a super recovery back up to '07 highs. I wouldn't give it a awfully high probability of another crash. I don't see anything from what I look at that would indicate that. But everything I look at tells me that something here is not right." - Odd Haavik, managing director & CEO, Charles Monat Associates
"We're at equilibrium here based on corporate profits, earnings and expectations. The market tells you what's going to happen in the future, and when expectations are fulfilled it sells on the news. There's not really all that much to look ahead to. The market made its prediction, the prediction's coming true, now the jury is out for the next quarter." - Michael Cohn, chief investment strategist, Atlantis Asset Management
“Markets are in a 10-year bull run. We’re in for a really good run, particularly looking at pessimism out there by the investor.” - Neil Hennessy, portfolio manager & CIO, Hennessy Funds (A prime example of contrarian thinking, i.e., if “everybody” is saying or doing something, then success is likely by taking the opposite tack.)
"Right now we've got a market where we've got an excellent stream of news, both on the macro side and in terms of results for the last five or six days and we've got a market which is failing to go up. A market that fails to go up on good news is probably a market that's going to go down and there does seem to be a bit of a change of mindset here. I think we've got a bit of results fatigue." - Nick Parsons, head of strategy, National Australia Bank
“The equity rally can continue but the drivers will definitely change in the next couple of quarters. We think that the junk rally — which has pushed markets higher throughout this year — will peter out and that the quality stocks — individual quality stocks — will basically take over the lead." - Franz Wenzel, senior investment strategist, AXA Investment Managers
“Business spending on equipment and software rose at a 7.3% annual rate in the third quarter. High tech is definitely doing well and is going to come out of the gate first here in terms of positive growth. I expect a 12.7% increase in fourth-quarter spending on equipment and software vs. the third quarter.” - Brian Bethune, economist, IHS Global Insight
“The rising market continues to surprise most people. A lot of people were looking for a lot weaker earnings season and looking for that as a potential catalyst for a correction, but that’s not been the case. The markets are going to see a ‘V-shaped’ bottom and that stocks are going to be higher a year from now than they are today. One of the most crowded trades is long gold and short dollar. So, when we start to see a positive turn in GDP, those two trades are going to unwind.” - Brian Belski, chief investment strategist, Oppenheimer
"We've seen incredible returns in emerging markets in the last six months to a year. If that continues, that definitely spurs demand for commodities. The bears are winning right now. People are buying commodities, anticipating higher demand moving forward. There have been huge returns in equity markets and people are looking for other ways to get returns than just investing in stocks." - Adam Gould, senior portfolio manager, Direxion Funds
Economic reports from the past week (with occasional translations…)
“Very early this year, when the consensus was predicting a 1% real economic growth rate for the third quarter, we were forecasting 3%. Now, the consensus is up to 3% and we are at 4%. Meanwhile, our forecast for the fourth quarter has jumped to a super-charged 5.5%.
While forecasting government data is fraught with peril, our optimism is based on the facts of a rebound in retail sales, a shrinking trade deficit, a slight uptick in home building, continued government spending and the rebuilding of business inventories - not blind optimism.” – Brian S. Wesbury, chief economist, First Trust (I’m with him…)
Starts for single-family homes increased 3.9% in September – the sixth increase in the last seven months – for a total gain of 40.3% since the bottom in January/February. The rate of home building remains far below the underlying demand for housing (about 1.6 million per year), based on population growth and “scrappage” (for reasons such as fires, disasters, and knock-downs). – US Department of Commerce (As a result of these data, inventories can continue to decline rapidly even as building continues to recover and add to the GDP growth.).
The cost of attending a four-year nonprofit private college increased 4.3% in the 2009-2010 academic year compared to a year ago, bringing the average annual price to $35,636, according to the College Board.
Growing at an even greater rate was the cost of going to a public college. Public in-state college costs rose 5.9%, bringing the average cost to $15,213. Out-of-state students saw their costs rise 6% to $26,741. All costs include tuition, fees and room and board. Public four-year colleges have increased in cost since they get less money per student from the state, so tuition is replacing money from the state. (Establishing 529 Plans can be a big help for kids and grandkids…)
“According to the US Department of Commerce, producer prices fell in September. Prices have been volatile in recent months, with September’s drop following a 1.7% gain in August. During the past six months, producer prices are up at a 5% annual rate.
Core prices for crude goods were up 3.6% in September and are up at a 63.3% annual rate in the past three months. What these core measures show is that inflation is in the production pipeline, percolating below the level of finished goods. The Fed is still implementing an incredibly loose monetary policy even as economic conditions are changing to make that policy less and less desirable. A revival in monetary velocity coupled with extremely loose monetary policy means higher inflation is going to hit the US economy over the next couple of years.” – Brian S. Wesbury, chief economist, First Trust
A gauge of the US economy's prospects rose for a sixth-straight month in September to a two-year high, according to The Conference Board, suggesting the US recovery was building steam. Its index of leading economic indicators rose 1% to 103.5, the highest level since October 2007. It said the sixth month growth rate for the index was at its highest pace since 1983.
The United States has the advantage of being the world's safe haven in times of panic and, as long as it retains that reputation, its debt sustainability won't be in doubt. According to the US Treasury Department, US debt held by the public stood at $7.53 trillion as of October 19th. That’s 53% of total output and up by about $1.5 trillion from one year ago.
Recent debt auctions have generally been well-received and major foreign investors, including China and Japan, have maintained their purchases. Those two countries together held $1.53 trillion in US Treasury debt as of August, up from $1.13 trillion a year earlier. (For all the talk of foreign ownership, the folks at home hold 7 times what the top two buyers do. Probably not time to be doing any vein opening just yet…)
Perspective
“Halfway point”
The halfway point I’m referring to is regarding the so-called “earnings season.” About half of the publicly traded companies have reported their results for the July – September quarter. Here’s a very cool piece of news to begin. Of all those companies – 80% have reported better than expected results. That’s fact. Were the expectations too low? Maybe. If so, why?
Here’s a little insight about these cats who create the expectations. None of them get paid for being too far off – up or down. So, very few have the fortitude to stand up and say – good or bad – I think that the consensus (herd mentality) is wrong and here are my numbers. That’s why, with the markets trending as they are, you get a lot of reports with the tag line of “better than expected.” I would add that consistency in hitting the target is quite hard and that’s why good analysts are well worth listening to. But, I digress…
The market, as noted by some in the Tea Leaf section, has passed 10,000 but can’t seem to decide what to do next. Sure, some of the companies yet to report will help provide some near-term direction but – as soon as those numbers are out – it’s back to “what have you done for me lately?” The fourth quarter comparisons should be fairly easy to beat since last year’s Q4 was – to be polite – atrocious. So, what do we do now?
In another of the many wonderful adages that Wall Street is known for, one that always rings true is that “you can’t go broke taking profits.” So, should you take a little something off the table now that the future as predicted by the markets six months ago has come to pass? Sure, why not? But – oops. Here’s the catch.
If I have a good company that still has a fundamental reason for owning it – as opposed to having bought it strictly for a trade – why sell it? Maybe I sell part and find a quality opportunity in an area that hasn’t recovered as much and invest there. The option is that you accept that a correction is a probability and just ride that out. Corrections come and go – they’re normal. Worst case, they give you a chance to buy something you’ve wanted more cheaply than what it has been selling at.
Human nature being what it is when it comes to investing, many people don’t want to do that. In retail, they call those markdown sales. In investing, many people won’t buy until whatever has gone up quite a lot. Never have understood that but it is more the rule than the exception.
Here’s the deal. Everybody has different needs, money available to invest, time lines for investing, goals, concerns and, yes, fears that need to be put into the mix. That’s why some talking head on TV, a website or magazine article is NOT the way to determine what’s best for you.
Find someone you can trust, someone who you know will work with your best interests in mind and make recommendations accordingly. That way, you know that whatever is going on in the daily noise of the markets, you are set up as you want to be to get you to where you want to go.
All my best,
Mike
509-747-3323
Closing values as of 23 October 2009 /
Dow Jones 9972 S&P500 1079 NASDAQ 2154 Oil $79.62/bbl Gold $1,055.50/oz
"Business is always a struggle. There are always obstacles and competitors. There is never an open road, except the wide road that leads to failure. Every great success has always been achieved by fight. Every winner has scars.... The people who succeed are the efficient few. They are the few who have the ambition and will-power to develop themselves.” – Herbert N. Casson (1869 - 1951) Canadian author
Overview
Last week saw the markets hitting 10,000 again and, since this time it was on the upside, that was a good thing.
This week saw another milestone – the anniversary of the 1987 market crash on the 19th. As it happened, this October 19th saw the establishment of another new high for the year. October, 1987, made what’s happened recently look like a tea dance in comparison. The drop all happened in one day – none of this stretching it out over a few months. Of course, the media was all over themselves in a contest as to who could do the most dramatic wail and gnash job in professing the ending of the world as we knew it.
I have to admit, it was interesting to watch that day. You know how when you go to the gas station and when you’re filling your tank, the numbers just go whirring by? That’s exactly how the market average numbers looked on our computers – and they were going straight down. A similar percentage drop happening today would equate to a one day cratering of over 2000 points. An attention getter to be sure.
Here are two points from that. First, when it was going on, like now, no one – of course – knew how it would turn out. (Six months after the event, the averages had recovered back and were higher than they were on the 18th of October.) Additionally, like now, good companies didn’t become bad simply because their share prices dropped.
Conclusion? Bad events have happened to the markets and economy before and they will again. Having a strategy that includes high quality investments and holding to it – in spite of the pouting pundits of pessimism – will always ultimately stand you in good stead.
Tea Leaf Readings
(I use this term to describe quotes from a number of opinion leaders about current market and economic events – what they see happening now and their expectations.)
"It has been a lovely rally. I think right now is a beautiful time to take some money off the table and to really try to protect it rather than to go for broke by expecting a super recovery back up to '07 highs. I wouldn't give it a awfully high probability of another crash. I don't see anything from what I look at that would indicate that. But everything I look at tells me that something here is not right." - Odd Haavik, managing director & CEO, Charles Monat Associates
"We're at equilibrium here based on corporate profits, earnings and expectations. The market tells you what's going to happen in the future, and when expectations are fulfilled it sells on the news. There's not really all that much to look ahead to. The market made its prediction, the prediction's coming true, now the jury is out for the next quarter." - Michael Cohn, chief investment strategist, Atlantis Asset Management
“Markets are in a 10-year bull run. We’re in for a really good run, particularly looking at pessimism out there by the investor.” - Neil Hennessy, portfolio manager & CIO, Hennessy Funds (A prime example of contrarian thinking, i.e., if “everybody” is saying or doing something, then success is likely by taking the opposite tack.)
"Right now we've got a market where we've got an excellent stream of news, both on the macro side and in terms of results for the last five or six days and we've got a market which is failing to go up. A market that fails to go up on good news is probably a market that's going to go down and there does seem to be a bit of a change of mindset here. I think we've got a bit of results fatigue." - Nick Parsons, head of strategy, National Australia Bank
“The equity rally can continue but the drivers will definitely change in the next couple of quarters. We think that the junk rally — which has pushed markets higher throughout this year — will peter out and that the quality stocks — individual quality stocks — will basically take over the lead." - Franz Wenzel, senior investment strategist, AXA Investment Managers
“Business spending on equipment and software rose at a 7.3% annual rate in the third quarter. High tech is definitely doing well and is going to come out of the gate first here in terms of positive growth. I expect a 12.7% increase in fourth-quarter spending on equipment and software vs. the third quarter.” - Brian Bethune, economist, IHS Global Insight
“The rising market continues to surprise most people. A lot of people were looking for a lot weaker earnings season and looking for that as a potential catalyst for a correction, but that’s not been the case. The markets are going to see a ‘V-shaped’ bottom and that stocks are going to be higher a year from now than they are today. One of the most crowded trades is long gold and short dollar. So, when we start to see a positive turn in GDP, those two trades are going to unwind.” - Brian Belski, chief investment strategist, Oppenheimer
"We've seen incredible returns in emerging markets in the last six months to a year. If that continues, that definitely spurs demand for commodities. The bears are winning right now. People are buying commodities, anticipating higher demand moving forward. There have been huge returns in equity markets and people are looking for other ways to get returns than just investing in stocks." - Adam Gould, senior portfolio manager, Direxion Funds
Economic reports from the past week (with occasional translations…)
“Very early this year, when the consensus was predicting a 1% real economic growth rate for the third quarter, we were forecasting 3%. Now, the consensus is up to 3% and we are at 4%. Meanwhile, our forecast for the fourth quarter has jumped to a super-charged 5.5%.
While forecasting government data is fraught with peril, our optimism is based on the facts of a rebound in retail sales, a shrinking trade deficit, a slight uptick in home building, continued government spending and the rebuilding of business inventories - not blind optimism.” – Brian S. Wesbury, chief economist, First Trust (I’m with him…)
Starts for single-family homes increased 3.9% in September – the sixth increase in the last seven months – for a total gain of 40.3% since the bottom in January/February. The rate of home building remains far below the underlying demand for housing (about 1.6 million per year), based on population growth and “scrappage” (for reasons such as fires, disasters, and knock-downs). – US Department of Commerce (As a result of these data, inventories can continue to decline rapidly even as building continues to recover and add to the GDP growth.).
The cost of attending a four-year nonprofit private college increased 4.3% in the 2009-2010 academic year compared to a year ago, bringing the average annual price to $35,636, according to the College Board.
Growing at an even greater rate was the cost of going to a public college. Public in-state college costs rose 5.9%, bringing the average cost to $15,213. Out-of-state students saw their costs rise 6% to $26,741. All costs include tuition, fees and room and board. Public four-year colleges have increased in cost since they get less money per student from the state, so tuition is replacing money from the state. (Establishing 529 Plans can be a big help for kids and grandkids…)
“According to the US Department of Commerce, producer prices fell in September. Prices have been volatile in recent months, with September’s drop following a 1.7% gain in August. During the past six months, producer prices are up at a 5% annual rate.
Core prices for crude goods were up 3.6% in September and are up at a 63.3% annual rate in the past three months. What these core measures show is that inflation is in the production pipeline, percolating below the level of finished goods. The Fed is still implementing an incredibly loose monetary policy even as economic conditions are changing to make that policy less and less desirable. A revival in monetary velocity coupled with extremely loose monetary policy means higher inflation is going to hit the US economy over the next couple of years.” – Brian S. Wesbury, chief economist, First Trust
A gauge of the US economy's prospects rose for a sixth-straight month in September to a two-year high, according to The Conference Board, suggesting the US recovery was building steam. Its index of leading economic indicators rose 1% to 103.5, the highest level since October 2007. It said the sixth month growth rate for the index was at its highest pace since 1983.
The United States has the advantage of being the world's safe haven in times of panic and, as long as it retains that reputation, its debt sustainability won't be in doubt. According to the US Treasury Department, US debt held by the public stood at $7.53 trillion as of October 19th. That’s 53% of total output and up by about $1.5 trillion from one year ago.
Recent debt auctions have generally been well-received and major foreign investors, including China and Japan, have maintained their purchases. Those two countries together held $1.53 trillion in US Treasury debt as of August, up from $1.13 trillion a year earlier. (For all the talk of foreign ownership, the folks at home hold 7 times what the top two buyers do. Probably not time to be doing any vein opening just yet…)
Perspective
“Halfway point”
The halfway point I’m referring to is regarding the so-called “earnings season.” About half of the publicly traded companies have reported their results for the July – September quarter. Here’s a very cool piece of news to begin. Of all those companies – 80% have reported better than expected results. That’s fact. Were the expectations too low? Maybe. If so, why?
Here’s a little insight about these cats who create the expectations. None of them get paid for being too far off – up or down. So, very few have the fortitude to stand up and say – good or bad – I think that the consensus (herd mentality) is wrong and here are my numbers. That’s why, with the markets trending as they are, you get a lot of reports with the tag line of “better than expected.” I would add that consistency in hitting the target is quite hard and that’s why good analysts are well worth listening to. But, I digress…
The market, as noted by some in the Tea Leaf section, has passed 10,000 but can’t seem to decide what to do next. Sure, some of the companies yet to report will help provide some near-term direction but – as soon as those numbers are out – it’s back to “what have you done for me lately?” The fourth quarter comparisons should be fairly easy to beat since last year’s Q4 was – to be polite – atrocious. So, what do we do now?
In another of the many wonderful adages that Wall Street is known for, one that always rings true is that “you can’t go broke taking profits.” So, should you take a little something off the table now that the future as predicted by the markets six months ago has come to pass? Sure, why not? But – oops. Here’s the catch.
If I have a good company that still has a fundamental reason for owning it – as opposed to having bought it strictly for a trade – why sell it? Maybe I sell part and find a quality opportunity in an area that hasn’t recovered as much and invest there. The option is that you accept that a correction is a probability and just ride that out. Corrections come and go – they’re normal. Worst case, they give you a chance to buy something you’ve wanted more cheaply than what it has been selling at.
Human nature being what it is when it comes to investing, many people don’t want to do that. In retail, they call those markdown sales. In investing, many people won’t buy until whatever has gone up quite a lot. Never have understood that but it is more the rule than the exception.
Here’s the deal. Everybody has different needs, money available to invest, time lines for investing, goals, concerns and, yes, fears that need to be put into the mix. That’s why some talking head on TV, a website or magazine article is NOT the way to determine what’s best for you.
Find someone you can trust, someone who you know will work with your best interests in mind and make recommendations accordingly. That way, you know that whatever is going on in the daily noise of the markets, you are set up as you want to be to get you to where you want to go.
All my best,
Mike
509-747-3323
Closing values as of 23 October 2009 /
Dow Jones 9972 S&P500 1079 NASDAQ 2154 Oil $79.62/bbl Gold $1,055.50/oz
Wednesday, October 21, 2009
Market retrospective - week of 16 October 2009
Contents: Overview; Tea leaf readings; Economic reports; Perspective, “The V-shaped recovery”
"An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today.” – Dr. Laurence J. Peter (1919 – 1990) Canadian author, “The Peter Principle”
Overview
Thursday saw the Dow close at its record high for the year at 10,062. We had some profit-taking Friday, so the index closed just below 10,000. What does that all mean?
Other than it being a psychological barrier and passing it making many individual investors more comfortable, from a fundamental standpoint, it has no real impact on the economy or markets. When the Dow first closed above 10,000 in March, 1999, it was cause for great euphoria – we’d never been that high before. On the other hand, the most recent time it closed above 10,000 was just about a year ago and celebration was not the descriptive term for that occasion.
10,000 is a nice reference point for where we are on the recovery. It's an important hurdle to get past, get through and leave behind. It’s highly likely that we’ll see some backing and filling over the next few weeks after 10,000 and after the earnings season concludes.
We still remain well below our October high of two years ago, so just think of it as a sign pointing us to the higher levels yet to come.
Tea Leaf Readings
(I use this term to describe quotes from a number of opinion leaders about current market and economic events – what they see happening now and their expectations.)
"Currency will be a big positive impact (on earnings). The lower dollar has many concerns to it, but it has a benefit to multinationals and I think that is a big expectation in terms of the quarter. Positive earnings surprises will be one factor that could keep the market moving higher for now. It appears the estimate for the third quarter earnings compared to second quarter are relatively on par. Given there have been some improvements in the tone of the economy and you have this currency affect, you have some upside." - Chris Sheldon, director of investment strategy, BNY Mellon Wealth management
"Our view is that risk assets will continue to outperform safe assets. That is equities and corporate bonds over Treasurys and cash. The economy is showing signs of recovery, even if growth is less robust than usual after a recession. We have to respect those cyclical positives. You need to own these risk assets, but play the higher quality ones." - Bob Doll, vice chairman and global CIO of equities, BlackRock
"Mid to long-term, I think tech offers you innovation, it offers you globalization and those are really attractive, and at these valuations, especially with the larger cap names, we think that's what next year's going to be about." - David Eiswert, analyst, T. Rowe Price Associates
“We are in the early stages of the recovery and it looks to be a lot stronger than the consensus for modest 2% - 3% GDP growth. Furthermore, the recovery will be V-shaped and is now virtually unstoppable - at least through the first half of 2010. This is because of ‘positive contagion’ in the economy right now, based on leading economic indicators. Most notably, the ECRI's index of Weekly Economic Indicators just hit a new record high.” - Lakshman Achuthan, managing director, Economic Cycle Research Institute (ECRI)
A survey found that 42% of workers think they will need about $500,000 in retirement savings to live comfortably once they stop working. The survey also revealed, however, that only 26% of workers over the age of 55 have set aside more than $250,000 towards their retirement. - Employee Benefit Research Institute
Minutes from the September 23 meeting indicated that policymakers feel that the economic outlook has improved and that job losses are slowing. In turn, most members have upwardly revised economic projections, though overall activity is still quite weak. – Federal Reserve Open Market Committee
Economic reports from the past week (with occasional translations…)
“The dollar had been strong because the US was a haven in the storm and now that the storm is abating, who needs the dollar? People got exasperated with the tiny returns on safe assets. Investors are sating their renewed risk appetites with developing nations’ stocks, currencies and the commodities some of them produce.” - Edmund Phelps, Columbia University, 2006 Nobel Prize in economics
“We’re in the midst of a classic overshoot of the dollar. The US outlook next year is more favorable than Japan and the euro area, the country’s current-account deficit is narrowing and the bond market isn’t reflecting inflation fears. The 16% rise this year in the Reuters/Jefferies CRB Index of 19 commodities is evidence that the flight to raw materials isn’t widespread.” - Michael Rosenberg, former head of foreign-exchange research, Deutsche Bank AG
“Oil consumption started to slump four years ago as consumers bought more efficient vehicles and countries expanded their use of alternative fuels like ethanol. Demand for oil in the US has fallen by 2 million barrels a day since 2005. A rebounding global economy spurred on mainly by China and other developing nations is expected to boost world oil demand by slightly under 1% next year.” - IHS Cambridge Energy Research Associates (This research report focuses on demand from 30 countries that are part of the Organization for Economic Cooperation and Development and make up 54% of the world's oil demand.)
Many workers in their early to mid 60s, who have lost their jobs, are opting for early retirement in order to collect Social Security benefits. Applications for retirement benefits (2.57 million) for the fiscal year ended September 30, 2009, rose 22% over the 2008 fiscal year – well above the anticipated 15% increase. - Social Security Administration
The number of US workers filing new claims for jobless insurance unexpectedly fell last week to the lowest level since January. New jobless claims have declined for five of the last six weeks.
The four-week moving average for new claims dipped last week, declining for a sixth straight week. The four-week moving average is considered a better gauge of underlying trends as it irons out week-to-week volatility.
Even more encouraging, the number of people collecting long-term unemployment benefits dropped. That was the first time that the so-called continuing claims had dropped below the 6 million mark since late March. This measure has trended lower for four consecutive weeks. – US Labor Department
“Core retail sales (retail sales ex-autos, building materials and gas) were up 0.5% from last month and are up in 3 out of the last 4 months. This shows that consumers have been spending, despite what the conventional wisdom has been saying. Sales at general merchandise stores (department stores and warehouse clubs) increased 0.9% in September and are up at a 13.3% annual rate in the past 2 months.
The revenge of the smokestack continued into September, with another large monthly gain in industrial production and upward revisions for August. Manufacturing output is up at a 14.5% annual rate in the past three months, the fastest pace for the initial stages of any recovery since the one in the early 1980s.
This is not just due to cash for clunkers artificially and temporarily boosting auto production. Excluding autos, manufacturing is up at a 7.5% annual rate, also beating the initial stages of any recovery since the one in the early 1980s. After the last two recessions (1990-91 and 2001), the service sector led, while manufacturing lagged. This time around, the manufacturing sector is leading the way in this V-shaped recovery.” – Brian S. Wesbury, Chief Economist, First Trust
Perspective
“The V-shaped recovery”
As Mr. Wesbury says, I firmly believe we are in the throes of a V-shaped recovery. Let’s talk about what that means.
The US economy has rebounded strongly over this past quarter and the expansion that’s been underway for a while now should definitely prove long-lasting, despite fears by many that it’s about to run out of gas.
In physics, there’s a law that says that for every action, there is an equal – and opposite – reaction. Because the markets and economy got whacked so badly about a year ago, we’re riding the elevator back up to where it was – reverting to the mean is the uptown phrase for this.
Look over these Tea Leaf comments and economic reports – it seems quite clear to me that what the market has been telling us since spring is coming to pass in spades. Remember that the markets are a forecasting-oriented. What’s happening now is in anticipation of what’s to come six to nine months in the future. As the recovery becomes more widespread, the more it gathers strength and momentum, carrying it forward even further.
I think we’re going to see quite large growth across the board being reported for the third quarter and continuing into the fourth. I also think that, as Mr. Wesbury suggests, the industrial/business side of our economy will be leading us – not the consumers. Consumers are coming back, don’t misunderstand – look at the retail sales. It’s just that the strength for the foreseeable future is business driven.
Many studies continue to show that investors – while not quite as standoffish as was the case a few months ago – still are refraining from getting into the markets at levels seen in normal, i.e., not bubble driven, conditions. That’s good because it shows there is still plenty of dry powder out there to keep the market fires going. It also helps to reinforce an old adage of the Street that says that “bull markets climb a wall of worry.” As long as there is a degree of skepticism, we’ll be fine.
It’s when complacency settles in that the lifeboat drills should begin…
When you do invest, stick with quality companies – innovators and leaders in their sectors. And don’t forget to include the overseas markets as well. There are many fine companies all over the globe that will reward you for your foresight.
All my best,
Mike
509-747-3323
Closing values as of 16 October 2009 /
Dow Jones 9995 S&P500 1087 NASDAQ 2156 Oil $78.57/bbl Gold $1,054/oz
"An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today.” – Dr. Laurence J. Peter (1919 – 1990) Canadian author, “The Peter Principle”
Overview
Thursday saw the Dow close at its record high for the year at 10,062. We had some profit-taking Friday, so the index closed just below 10,000. What does that all mean?
Other than it being a psychological barrier and passing it making many individual investors more comfortable, from a fundamental standpoint, it has no real impact on the economy or markets. When the Dow first closed above 10,000 in March, 1999, it was cause for great euphoria – we’d never been that high before. On the other hand, the most recent time it closed above 10,000 was just about a year ago and celebration was not the descriptive term for that occasion.
10,000 is a nice reference point for where we are on the recovery. It's an important hurdle to get past, get through and leave behind. It’s highly likely that we’ll see some backing and filling over the next few weeks after 10,000 and after the earnings season concludes.
We still remain well below our October high of two years ago, so just think of it as a sign pointing us to the higher levels yet to come.
Tea Leaf Readings
(I use this term to describe quotes from a number of opinion leaders about current market and economic events – what they see happening now and their expectations.)
"Currency will be a big positive impact (on earnings). The lower dollar has many concerns to it, but it has a benefit to multinationals and I think that is a big expectation in terms of the quarter. Positive earnings surprises will be one factor that could keep the market moving higher for now. It appears the estimate for the third quarter earnings compared to second quarter are relatively on par. Given there have been some improvements in the tone of the economy and you have this currency affect, you have some upside." - Chris Sheldon, director of investment strategy, BNY Mellon Wealth management
"Our view is that risk assets will continue to outperform safe assets. That is equities and corporate bonds over Treasurys and cash. The economy is showing signs of recovery, even if growth is less robust than usual after a recession. We have to respect those cyclical positives. You need to own these risk assets, but play the higher quality ones." - Bob Doll, vice chairman and global CIO of equities, BlackRock
"Mid to long-term, I think tech offers you innovation, it offers you globalization and those are really attractive, and at these valuations, especially with the larger cap names, we think that's what next year's going to be about." - David Eiswert, analyst, T. Rowe Price Associates
“We are in the early stages of the recovery and it looks to be a lot stronger than the consensus for modest 2% - 3% GDP growth. Furthermore, the recovery will be V-shaped and is now virtually unstoppable - at least through the first half of 2010. This is because of ‘positive contagion’ in the economy right now, based on leading economic indicators. Most notably, the ECRI's index of Weekly Economic Indicators just hit a new record high.” - Lakshman Achuthan, managing director, Economic Cycle Research Institute (ECRI)
A survey found that 42% of workers think they will need about $500,000 in retirement savings to live comfortably once they stop working. The survey also revealed, however, that only 26% of workers over the age of 55 have set aside more than $250,000 towards their retirement. - Employee Benefit Research Institute
Minutes from the September 23 meeting indicated that policymakers feel that the economic outlook has improved and that job losses are slowing. In turn, most members have upwardly revised economic projections, though overall activity is still quite weak. – Federal Reserve Open Market Committee
Economic reports from the past week (with occasional translations…)
“The dollar had been strong because the US was a haven in the storm and now that the storm is abating, who needs the dollar? People got exasperated with the tiny returns on safe assets. Investors are sating their renewed risk appetites with developing nations’ stocks, currencies and the commodities some of them produce.” - Edmund Phelps, Columbia University, 2006 Nobel Prize in economics
“We’re in the midst of a classic overshoot of the dollar. The US outlook next year is more favorable than Japan and the euro area, the country’s current-account deficit is narrowing and the bond market isn’t reflecting inflation fears. The 16% rise this year in the Reuters/Jefferies CRB Index of 19 commodities is evidence that the flight to raw materials isn’t widespread.” - Michael Rosenberg, former head of foreign-exchange research, Deutsche Bank AG
“Oil consumption started to slump four years ago as consumers bought more efficient vehicles and countries expanded their use of alternative fuels like ethanol. Demand for oil in the US has fallen by 2 million barrels a day since 2005. A rebounding global economy spurred on mainly by China and other developing nations is expected to boost world oil demand by slightly under 1% next year.” - IHS Cambridge Energy Research Associates (This research report focuses on demand from 30 countries that are part of the Organization for Economic Cooperation and Development and make up 54% of the world's oil demand.)
Many workers in their early to mid 60s, who have lost their jobs, are opting for early retirement in order to collect Social Security benefits. Applications for retirement benefits (2.57 million) for the fiscal year ended September 30, 2009, rose 22% over the 2008 fiscal year – well above the anticipated 15% increase. - Social Security Administration
The number of US workers filing new claims for jobless insurance unexpectedly fell last week to the lowest level since January. New jobless claims have declined for five of the last six weeks.
The four-week moving average for new claims dipped last week, declining for a sixth straight week. The four-week moving average is considered a better gauge of underlying trends as it irons out week-to-week volatility.
Even more encouraging, the number of people collecting long-term unemployment benefits dropped. That was the first time that the so-called continuing claims had dropped below the 6 million mark since late March. This measure has trended lower for four consecutive weeks. – US Labor Department
“Core retail sales (retail sales ex-autos, building materials and gas) were up 0.5% from last month and are up in 3 out of the last 4 months. This shows that consumers have been spending, despite what the conventional wisdom has been saying. Sales at general merchandise stores (department stores and warehouse clubs) increased 0.9% in September and are up at a 13.3% annual rate in the past 2 months.
The revenge of the smokestack continued into September, with another large monthly gain in industrial production and upward revisions for August. Manufacturing output is up at a 14.5% annual rate in the past three months, the fastest pace for the initial stages of any recovery since the one in the early 1980s.
This is not just due to cash for clunkers artificially and temporarily boosting auto production. Excluding autos, manufacturing is up at a 7.5% annual rate, also beating the initial stages of any recovery since the one in the early 1980s. After the last two recessions (1990-91 and 2001), the service sector led, while manufacturing lagged. This time around, the manufacturing sector is leading the way in this V-shaped recovery.” – Brian S. Wesbury, Chief Economist, First Trust
Perspective
“The V-shaped recovery”
As Mr. Wesbury says, I firmly believe we are in the throes of a V-shaped recovery. Let’s talk about what that means.
The US economy has rebounded strongly over this past quarter and the expansion that’s been underway for a while now should definitely prove long-lasting, despite fears by many that it’s about to run out of gas.
In physics, there’s a law that says that for every action, there is an equal – and opposite – reaction. Because the markets and economy got whacked so badly about a year ago, we’re riding the elevator back up to where it was – reverting to the mean is the uptown phrase for this.
Look over these Tea Leaf comments and economic reports – it seems quite clear to me that what the market has been telling us since spring is coming to pass in spades. Remember that the markets are a forecasting-oriented. What’s happening now is in anticipation of what’s to come six to nine months in the future. As the recovery becomes more widespread, the more it gathers strength and momentum, carrying it forward even further.
I think we’re going to see quite large growth across the board being reported for the third quarter and continuing into the fourth. I also think that, as Mr. Wesbury suggests, the industrial/business side of our economy will be leading us – not the consumers. Consumers are coming back, don’t misunderstand – look at the retail sales. It’s just that the strength for the foreseeable future is business driven.
Many studies continue to show that investors – while not quite as standoffish as was the case a few months ago – still are refraining from getting into the markets at levels seen in normal, i.e., not bubble driven, conditions. That’s good because it shows there is still plenty of dry powder out there to keep the market fires going. It also helps to reinforce an old adage of the Street that says that “bull markets climb a wall of worry.” As long as there is a degree of skepticism, we’ll be fine.
It’s when complacency settles in that the lifeboat drills should begin…
When you do invest, stick with quality companies – innovators and leaders in their sectors. And don’t forget to include the overseas markets as well. There are many fine companies all over the globe that will reward you for your foresight.
All my best,
Mike
509-747-3323
Closing values as of 16 October 2009 /
Dow Jones 9995 S&P500 1087 NASDAQ 2156 Oil $78.57/bbl Gold $1,054/oz
Monday, October 12, 2009
Market retrospective - week of 9 October 2009
Contents: Overview; Tea leaf readings; Economic reports; Perspective, “What’s the deal with gold?”
"October. This is one of the peculiarly dangerous months to speculate in stocks. Others are November, December, January, February, March, April, May, June, July, August and September." – Mark Twain (1835 – 1910) American author and humorist (Speculate being the operative term here…)
Overview
Friday was the second anniversary of the Dow and S&P having hit their all-time highs. The NASDAQ hit its high back in the dot.com era in March, 2000. I don’t know how any of that played into the past week’s results but the week was outstanding on its own. It was up over 4% - the best week in over two years.
Alcoa did its bit, starting the official earnings season with much better than expected numbers and, on top of that, predicting an upturn in aluminum usage. That’s important n that aluminum is used in many sectors of the economy. We saw the service sector index – 80% of our economy today – reporting growth for the first time in a year. Initial unemployment claims continue to trend downward. While still showing a relatively weak labor demand, the gap between the business activity index component of the index and the employment index, is very similar to that in the early stages of the 2002 recovery.
As you can see in the Tea Leaf and Economic sections, there is a lot of positive data about the economy and the markets now. We are well past the so-called green shoots stage of the spring. And yet, Dr. Nourini Roubini, aka, Dr. Doom, and his ilk, are still beating the woe is me, sky is falling drum.
Due to the nature of the markets, I can’t say, for sure, that they’re wrong. However, even stopped clocks are right twice a day and I think their time has passed for now…
Tea Leaf Readings
(I use this term to describe quotes from a number of opinion leaders about current market and economic events – what they see happening now and their expectations.)
"Sustainable economic growth and low interest rates worldwide will spur a multi-year bull market in equities, led by developing nations. Low growth means low interest rates and actually that’s one of the best environments for stock-market investing. Anything that can show growth in this low-growth environment is going to be bid up by investors. It’s very pro the emerging-market world versus the developed world.” - Anthony Bolton, president of investments, Fidelity International
“The US economic rebound should support higher interest rates sooner rather than later and increases to the Fed’s target rate for overnight bank loans wouldn’t derail the U.S. recovery. I would not support a tight monetary policy in the current environment, but my experience tells me that we will need to remove our very accommodative policy sooner rather than later.” - Thomas Hoenig, President, Federal Reserve Bank of Kansas City
“In words, many see a need for ‘social justice’ to override ‘the dictates of the market.’ In reality, what is called ‘the market’ consists of human beings making their own choices at their own cost. What is called ‘social justice’ is government imposition of the notions of third parties, who pay no price for being wrong.” – Dr. Thomas Sowell, American economist, social commentator (I’m with him…)
“The stock rally should continue into the fourth quarter. We’re seeing an improvement in economic indicators. And Alcoa sent a very good indication for the overall earnings season. Commodities companies are early-cycle plays. That’s another indication that things are getting better.” - Tom Wirth, senior investment officer, Chemung Canal Trust Co.
"Accommodative policies will likely be warranted for an extended period. At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road. When the economic outlook has improved sufficiently, we will be prepared to tighten the stance of monetary policy and eventually return our balance sheet to a more normal configuration." - Ben Bernanke, Chairman, Federal Reserve Bank
“The market is only about halfway through what is historically typical of a bear-market recovery—and this time around, the rebound is likely to be even bigger. We’ve analyzed 14 past bear markets—ranging from gold to US stocks—and found that when markets dipped more than 40%, the average rally off the lows was about 72%.
Since the Dow is up only about 45% and the S&P about 52%, the market still has a lot of room to the upside. We've had a tremendous, an unbelievable decline in both the economy and the stock market and so I just think we're going to have a bigger than normal bounce. I just think we've got further to go." – Barton Biggs, CEO, Traxis Partners and former chief global strategist for Morgan Stanley
“Since 1871, the three worst ten-year returns for stocks have ended in the years 1974, 1920 and 1978. These were followed, respectively, by real, after-inflation stock returns of more than 8%, 13% and 9% over next ten years. In fact, for the 13 ten-year periods of negative returns stocks have suffered since 1871, the next ten years gave investors real returns that averaged over 10% per year. This return has far exceeded the average 6.66% return in all ten years periods and is twice the return offered by long-term government bonds. At the end of March of this year, the annual returns on long-term treasuries did outpace stocks over the last 40 years, 8.90% to 8.71%.
While the stock return was below its long-term average, the return on treasury bonds was well above average. Indeed to obtain those bond returns over the next 40 years, yields on long-term US treasury bonds would have to fall to about 2%, an exceedingly unlikely scenario. In fact, with the recent stock market recovery and bond market decline, stock returns now handily outpace bond returns over the past 30 and 40 years.
US stocks are cheap compared to forecast earnings. For the S&P 500 index, stocks are now selling for about 14 times projected operating earnings for 2010. Since 1955, stocks have sold at an average 18 to 20 times earnings when interest rates and inflation are low, such as now.
The recent behaviour of stock market prices sheds some light on a phenomenon which has long puzzled economists: why do stocks over the long run yield so much more than bonds? The pain that investors often suffer, such as in the recent bear market, forces many to forsake equities altogether. This drives stock prices down and enhances their future returns. Equities offer investors excellent returns to those willing to accept the market’s volatility.” - Jeremy J. Siegel, Russell E. Palmer professor of finance at the Wharton School, University of Pennsylvania, author of “Stocks for the Long Run”
Economic reports from the past week (with occasional translations…)
The US service sector expanded for the first time in a year in September at a faster pace than expected. The Institute for Supply Management's services index rose to 50.9 last month from 48.4 in August. The dividing line between growth and contraction is 50. The services sector represents about 80% of U.S. economic activity, including businesses such as banks, airlines, hotels and restaurants.
Overseas markets rallied on Tuesday as Australia's central bank became the first major central bank to boost interest rates. The Australia Reserve Bank hiked its key lending rate by 25 basis points to 3.25%. Though the rate hike may strike some as an unlikely impetus for higher stock prices, global participants were encouraged by the symbolism of the act, since it suggests that the global economy has strengthened. Australia's central bank governor said it was time to begin reducing stimulus provided by low interest rates and that the risk of major economic contraction in the country was over.
Freddie Mac reported that the average rate on the 30-year mortgage dropped to 4.87% this week, down from 4.94% last week. Homebuilders rallied as analysts are growing more optimistic about the sector, citing the winning combination of rising home prices, falling mortgage rates and continued government intervention.
Congress is considering a possible extension of the $8,000 first-time homebuyer's tax credit, which is set to expire on Nov. 30. No word on how long the extension would be.
The US Commerce Department that the US trade deficit unexpectedly narrowed for the first time in four months in August, with exports rising to their highest level of the year and imports easing, despite higher oil prices. US exports in August rose 0.2% to $128.22 billion from $128.00 billion the previous month. Exports were at their highest level since last December.
“The basic fallacy of cash for clunkers is that you can somehow create wealth by destroying existing assets that are still productive, in this case cars that still work. Under the program, auto dealers were required to destroy the car engines of trade-ins with a sodium silicate solution, then smash them and send them to the junk yard. As the journalist Henry Hazlitt wrote in his classic, "Economics in One Lesson," you can't raise living standards by breaking windows so some people can get jobs repairing them.
In the category of all-time dumb ideas, cash for clunkers rivals the New Deal brainstorm to slaughter pigs to raise pork prices. The people who really belong in the junk yard are the wizards in Washington who peddled this economic malarkey.” – Wall Street Journal, 6 October
Perspective
“What’s the deal with gold?”
The gold bugs are finally enjoying their moment in the sun. After 20 horrible years, in which gold dropped from $800 to $250 an ounce, the sometimes-precious metal is now roaring to all-time nominal highs.
Even with the run over the past five years, gold is still trading well below its all-time peak, after adjusting for inflation. It hit its highest value in January 1980, when it reached a high of $873 per troy ounce. Inflation surged to a 14.8% annual rate in March 1980, after a four-year gain in gold that included that record. If you factor in inflation since then, that price of gold would stand at about $2,049 per troy ounce - about twice what current values are now. Given that gold is supposed to protect you from inflation, this performance is pretty horrible.
What's more, gold has actually performed poorly this year relative to other more boring metals like copper and silver because those metals are actually used for something. China's building houses again, which means they're scarfing up all the copper in the world. If history is an indicator, one thing is for certain. The higher gold prices go, the more people will be convinced it is a “great investment”. And the more people will fight each other out of the way to put it in their portfolios, moving prices artificially higher. Emotions will trump logic yet again.
However, since the media seemingly likes to look at these kinds of data only on a short-term basis, let’s look at this year.
On 15 January, gold closed at $807 per ounce. Since that time, gold is up about 30%. That’s great for those who bought in around then, but what about now?
The weak dollar is one of the keys to the recent rise in gold prices. A weak dollar can eventually lead to import-led inflation down the road inasmuch as a weaker dollar makes gold and dollar-priced assets cheaper for holders of other currencies. Gold has also gained on lack of faith in the administration and that increasing US debt will continue to drive down the value of the dollar. Obama has increased the nation’s marketable debt to an unprecedented $7.1 trillion as the government borrows to revive growth. Goldman Sachs predicts the US will sell about $2.9 trillion of debt in the two years ending next September.
Adding to the weakness is the fact that the Federal Reserve is keeping interest rates near zero percent. Other currencies offer higher rates so the dollar remains low/weak. The longer the US rates remain at these levels, the higher the likelihood of inflation, probably around 2011.
The slump will abate and the dollar will rebound to $1.46 against the euro by year-end and to $1.45 by March 31, according to the median forecast of 48 analysts surveyed by Bloomberg News. Forward rates suggest the dollar will be little changed in six months, at around $1.47.
Gold is appreciating along with other assets, from commodities to stocks, because money is so cheap. The dollar’s slump has prompted investors to buy commodities as a hedge against potential inflation.
A real conflict appears to be brewing in the financial markets. The Fed is fighting deflation with it’s near-zero interest-rate target, while gold, the dollar and commodity markets are signaling that inflation is the real problem.
Somebody is going to be very right here and somebody is going to be very wrong.
As is the case most times, I’m betting on the markets being right.
All my best,
Mike
509-747-3323
Closing values as of 9 October 2009 /
Dow Jones 9664 S&P500 1071 NASDAQ 2139 Oil $72.29/bbl Gold $1,048.60/oz
"October. This is one of the peculiarly dangerous months to speculate in stocks. Others are November, December, January, February, March, April, May, June, July, August and September." – Mark Twain (1835 – 1910) American author and humorist (Speculate being the operative term here…)
Overview
Friday was the second anniversary of the Dow and S&P having hit their all-time highs. The NASDAQ hit its high back in the dot.com era in March, 2000. I don’t know how any of that played into the past week’s results but the week was outstanding on its own. It was up over 4% - the best week in over two years.
Alcoa did its bit, starting the official earnings season with much better than expected numbers and, on top of that, predicting an upturn in aluminum usage. That’s important n that aluminum is used in many sectors of the economy. We saw the service sector index – 80% of our economy today – reporting growth for the first time in a year. Initial unemployment claims continue to trend downward. While still showing a relatively weak labor demand, the gap between the business activity index component of the index and the employment index, is very similar to that in the early stages of the 2002 recovery.
As you can see in the Tea Leaf and Economic sections, there is a lot of positive data about the economy and the markets now. We are well past the so-called green shoots stage of the spring. And yet, Dr. Nourini Roubini, aka, Dr. Doom, and his ilk, are still beating the woe is me, sky is falling drum.
Due to the nature of the markets, I can’t say, for sure, that they’re wrong. However, even stopped clocks are right twice a day and I think their time has passed for now…
Tea Leaf Readings
(I use this term to describe quotes from a number of opinion leaders about current market and economic events – what they see happening now and their expectations.)
"Sustainable economic growth and low interest rates worldwide will spur a multi-year bull market in equities, led by developing nations. Low growth means low interest rates and actually that’s one of the best environments for stock-market investing. Anything that can show growth in this low-growth environment is going to be bid up by investors. It’s very pro the emerging-market world versus the developed world.” - Anthony Bolton, president of investments, Fidelity International
“The US economic rebound should support higher interest rates sooner rather than later and increases to the Fed’s target rate for overnight bank loans wouldn’t derail the U.S. recovery. I would not support a tight monetary policy in the current environment, but my experience tells me that we will need to remove our very accommodative policy sooner rather than later.” - Thomas Hoenig, President, Federal Reserve Bank of Kansas City
“In words, many see a need for ‘social justice’ to override ‘the dictates of the market.’ In reality, what is called ‘the market’ consists of human beings making their own choices at their own cost. What is called ‘social justice’ is government imposition of the notions of third parties, who pay no price for being wrong.” – Dr. Thomas Sowell, American economist, social commentator (I’m with him…)
“The stock rally should continue into the fourth quarter. We’re seeing an improvement in economic indicators. And Alcoa sent a very good indication for the overall earnings season. Commodities companies are early-cycle plays. That’s another indication that things are getting better.” - Tom Wirth, senior investment officer, Chemung Canal Trust Co.
"Accommodative policies will likely be warranted for an extended period. At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road. When the economic outlook has improved sufficiently, we will be prepared to tighten the stance of monetary policy and eventually return our balance sheet to a more normal configuration." - Ben Bernanke, Chairman, Federal Reserve Bank
“The market is only about halfway through what is historically typical of a bear-market recovery—and this time around, the rebound is likely to be even bigger. We’ve analyzed 14 past bear markets—ranging from gold to US stocks—and found that when markets dipped more than 40%, the average rally off the lows was about 72%.
Since the Dow is up only about 45% and the S&P about 52%, the market still has a lot of room to the upside. We've had a tremendous, an unbelievable decline in both the economy and the stock market and so I just think we're going to have a bigger than normal bounce. I just think we've got further to go." – Barton Biggs, CEO, Traxis Partners and former chief global strategist for Morgan Stanley
“Since 1871, the three worst ten-year returns for stocks have ended in the years 1974, 1920 and 1978. These were followed, respectively, by real, after-inflation stock returns of more than 8%, 13% and 9% over next ten years. In fact, for the 13 ten-year periods of negative returns stocks have suffered since 1871, the next ten years gave investors real returns that averaged over 10% per year. This return has far exceeded the average 6.66% return in all ten years periods and is twice the return offered by long-term government bonds. At the end of March of this year, the annual returns on long-term treasuries did outpace stocks over the last 40 years, 8.90% to 8.71%.
While the stock return was below its long-term average, the return on treasury bonds was well above average. Indeed to obtain those bond returns over the next 40 years, yields on long-term US treasury bonds would have to fall to about 2%, an exceedingly unlikely scenario. In fact, with the recent stock market recovery and bond market decline, stock returns now handily outpace bond returns over the past 30 and 40 years.
US stocks are cheap compared to forecast earnings. For the S&P 500 index, stocks are now selling for about 14 times projected operating earnings for 2010. Since 1955, stocks have sold at an average 18 to 20 times earnings when interest rates and inflation are low, such as now.
The recent behaviour of stock market prices sheds some light on a phenomenon which has long puzzled economists: why do stocks over the long run yield so much more than bonds? The pain that investors often suffer, such as in the recent bear market, forces many to forsake equities altogether. This drives stock prices down and enhances their future returns. Equities offer investors excellent returns to those willing to accept the market’s volatility.” - Jeremy J. Siegel, Russell E. Palmer professor of finance at the Wharton School, University of Pennsylvania, author of “Stocks for the Long Run”
Economic reports from the past week (with occasional translations…)
The US service sector expanded for the first time in a year in September at a faster pace than expected. The Institute for Supply Management's services index rose to 50.9 last month from 48.4 in August. The dividing line between growth and contraction is 50. The services sector represents about 80% of U.S. economic activity, including businesses such as banks, airlines, hotels and restaurants.
Overseas markets rallied on Tuesday as Australia's central bank became the first major central bank to boost interest rates. The Australia Reserve Bank hiked its key lending rate by 25 basis points to 3.25%. Though the rate hike may strike some as an unlikely impetus for higher stock prices, global participants were encouraged by the symbolism of the act, since it suggests that the global economy has strengthened. Australia's central bank governor said it was time to begin reducing stimulus provided by low interest rates and that the risk of major economic contraction in the country was over.
Freddie Mac reported that the average rate on the 30-year mortgage dropped to 4.87% this week, down from 4.94% last week. Homebuilders rallied as analysts are growing more optimistic about the sector, citing the winning combination of rising home prices, falling mortgage rates and continued government intervention.
Congress is considering a possible extension of the $8,000 first-time homebuyer's tax credit, which is set to expire on Nov. 30. No word on how long the extension would be.
The US Commerce Department that the US trade deficit unexpectedly narrowed for the first time in four months in August, with exports rising to their highest level of the year and imports easing, despite higher oil prices. US exports in August rose 0.2% to $128.22 billion from $128.00 billion the previous month. Exports were at their highest level since last December.
“The basic fallacy of cash for clunkers is that you can somehow create wealth by destroying existing assets that are still productive, in this case cars that still work. Under the program, auto dealers were required to destroy the car engines of trade-ins with a sodium silicate solution, then smash them and send them to the junk yard. As the journalist Henry Hazlitt wrote in his classic, "Economics in One Lesson," you can't raise living standards by breaking windows so some people can get jobs repairing them.
In the category of all-time dumb ideas, cash for clunkers rivals the New Deal brainstorm to slaughter pigs to raise pork prices. The people who really belong in the junk yard are the wizards in Washington who peddled this economic malarkey.” – Wall Street Journal, 6 October
Perspective
“What’s the deal with gold?”
The gold bugs are finally enjoying their moment in the sun. After 20 horrible years, in which gold dropped from $800 to $250 an ounce, the sometimes-precious metal is now roaring to all-time nominal highs.
Even with the run over the past five years, gold is still trading well below its all-time peak, after adjusting for inflation. It hit its highest value in January 1980, when it reached a high of $873 per troy ounce. Inflation surged to a 14.8% annual rate in March 1980, after a four-year gain in gold that included that record. If you factor in inflation since then, that price of gold would stand at about $2,049 per troy ounce - about twice what current values are now. Given that gold is supposed to protect you from inflation, this performance is pretty horrible.
What's more, gold has actually performed poorly this year relative to other more boring metals like copper and silver because those metals are actually used for something. China's building houses again, which means they're scarfing up all the copper in the world. If history is an indicator, one thing is for certain. The higher gold prices go, the more people will be convinced it is a “great investment”. And the more people will fight each other out of the way to put it in their portfolios, moving prices artificially higher. Emotions will trump logic yet again.
However, since the media seemingly likes to look at these kinds of data only on a short-term basis, let’s look at this year.
On 15 January, gold closed at $807 per ounce. Since that time, gold is up about 30%. That’s great for those who bought in around then, but what about now?
The weak dollar is one of the keys to the recent rise in gold prices. A weak dollar can eventually lead to import-led inflation down the road inasmuch as a weaker dollar makes gold and dollar-priced assets cheaper for holders of other currencies. Gold has also gained on lack of faith in the administration and that increasing US debt will continue to drive down the value of the dollar. Obama has increased the nation’s marketable debt to an unprecedented $7.1 trillion as the government borrows to revive growth. Goldman Sachs predicts the US will sell about $2.9 trillion of debt in the two years ending next September.
Adding to the weakness is the fact that the Federal Reserve is keeping interest rates near zero percent. Other currencies offer higher rates so the dollar remains low/weak. The longer the US rates remain at these levels, the higher the likelihood of inflation, probably around 2011.
The slump will abate and the dollar will rebound to $1.46 against the euro by year-end and to $1.45 by March 31, according to the median forecast of 48 analysts surveyed by Bloomberg News. Forward rates suggest the dollar will be little changed in six months, at around $1.47.
Gold is appreciating along with other assets, from commodities to stocks, because money is so cheap. The dollar’s slump has prompted investors to buy commodities as a hedge against potential inflation.
A real conflict appears to be brewing in the financial markets. The Fed is fighting deflation with it’s near-zero interest-rate target, while gold, the dollar and commodity markets are signaling that inflation is the real problem.
Somebody is going to be very right here and somebody is going to be very wrong.
As is the case most times, I’m betting on the markets being right.
All my best,
Mike
509-747-3323
Closing values as of 9 October 2009 /
Dow Jones 9664 S&P500 1071 NASDAQ 2139 Oil $72.29/bbl Gold $1,048.60/oz
Monday, October 5, 2009
Market retrospective - week of 2 October 2009
Contents: Overview; Tea leaf readings; Economic reports; Perspective, “Continuing recovery – NOT a prelude to collapse”
“The record of history is absolutely crystal clear: that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.“ - Milton Friedman (1912 – 2006) American economist; winner of Nobel Prize in Economics
Overview
This last month certainly went a long way toward reinforcing the folly of listening to the conventional “wisdom”.
Remember? “September is bad – watch out. It’s the worst month of the year for the stock market.” Except, of course, like this time when it wasn’t. Here’s something about the markets I constantly have had reinforced to me over the years – if “everyone” is doing it, or believes it, do the exact opposite…
The three major stock indexes had their best quarters in 11 years as both the Dow Jones and S&P 500 had gains of 15% over the most recent three month period. The NASDAQ, home of the major tech and newer growth companies, was up 15.7% over the same time. We don’t see gains like those in most year periods. More manifestation of the V-shaped recovery we’re involved with now.
Now the doomsayers are out saying “well, okay, you were lucky in September. But October? You really better watch out now. Historically, this month is a total giant killer. You’ll probably get totally smooshed this month.” Unless, of course, you don’t.
The point is no one knows what the markets will give you in the short-term. We could continue higher or we could get a correction or they could just slip-slide sideways. They are completely unknowable. However, over the long term, the markets are inevitable in their upward trend.
Tea Leaf Readings
(I use this term to describe quotes from a number of opinion leaders about current market and economic events – what they see happening now and their expectations.)
"We think equities will now trade above my previous target for this year, in large part because earnings will be higher than we previously anticipated.” - Jason Todd, investment strategist, Morgan Stanley (This is significant in that, until last week, he had been predicting that the market would fall 14% from today's levels by the end of the year. Now he’s saying that the S&P 500-stock index is likely to rise somewhat between now and year's end and could be up as much as 15% before it “gets into trouble.”)
"Once again, we will see a lot of companies beating estimates as the earnings season gets going in earnest in October. This time, sales are going to be an even bigger surprise than profits. Sales have been slow to recover as consumer spending has remained muted. Companies have been holding up profits by cutting costs. Now, as the recession shows signs of ending, sales could surprise the analysts, although sales still are likely to be down from a year ago. Stronger-than-expected sales would boost profit margins and give the stock rally fresh fuel. This would also be a welcome sign that earnings are being driven by customer demand and not cost cutting.” - Jeffrey Kleintop, chief market strategist, LPL Financial
"The outlook for global equity markets will stay favourable over the next months — further price gains are expected, driven by higher multiples and a recovery in earnings. An increase in new company orders and industrial production are positive impulses for corporate profitability.” - Gerhard Schwarz, head of global equity strategy, UniCredit
The latest weekly survey by the American Association of Individual Investors found that bearishness among investors stood at 44.5%, above the long-term average of 30%. Many of those investors are still drifting to what they perceive as safer investments. In August, investors moved $42.9 billion into bond funds and only $3.9 billion into stock funds, according to the Investment Company Institute, the mutual fund trade group. (Please note my comments in the overview. The stock market often rewards the contrarian; so many analysts see investors' doubts as one of the strongest signals that the rally will continue.)
“There are positive economic surprises that are going to come in the rest of the fall. That’s what the leading economic indicators and markets are telling us. Today’s positive feedback loop is a mirror image of the negative feedback loop during the fall and winter of last year. Better economic numbers lead to better corporate earnings outlook, which leads to rising corporate and bond prices which in turn improves balance sheets and more economic growth.” - John Merrill, founder/CIO, Tanglewood Wealth Management
"I think we're starting a 10-year bull market. During that time, the Dow will double for sure from current levels. Stocks are the only reasonable money-making investment in this current environment of low interest rates. Why put your money into a 30-year U.S. government bond at 4% and wait 30 years to get your money back? Instead, buy the Dow Jones Industrial Average. The 30 components are yielding a 3% dividend and, unlike Treasuries, offer a growth opportunity. Plus, with trillions in cash on the sidelines waiting to get in the game, the market's headed in one direction: Up.” - Neil Hennessy, chief investment officer, Hennessey Funds
“We’re hitting a little bit of a soft spot in economic growth. We would not be surprised to see a 5% plus pullback in the marketplace. I still think we’ll be higher by year-end as third- and fourth-quarter economic growth and corporate earnings outpace expectations.” - Michael Mullaney, money manager, Fiduciary Trust Co.
"Economic data rarely move in a consistent pattern. We should not be surprised that there are bumps in the road. Unfortunately, investors want the latest data to always be better than the previous ones and that is unrealistic. Thus, they react wildly." - Joel Naroff, Naroff Economic Advisors
“Don’t confuse the economy with the stock market. We’re in the beginning of a new bull market and you can’t confuse backward looking jobless numbers with the stock market.” - Jordan Kimmel, market strategist, National Securities
Economic reports from the past week (with occasional translations…)
“The employment situation has remained much weaker much longer than the overall economy. In September, the jobless rate rose to the highest level since 1983. There are two reasons for the disconnect between the economic recovery and the labor market. (Unemployment numbers are always the last indicator to turn for the better.)
First, productivity growth has been rapid of late, part of the ongoing process of technological change that rivals (and may surpass) the industrial revolution. Second, corporate leaders still think the recent spurt in growth will be short-lived and so are being overly cautious. In the short term, productivity growth lets companies raise production even as they continue to cut jobs. Over time, though, higher output with lower labor costs mean more profits, which will help stimulate rapid job growth once companies become more confident about the staying power of the recovery. When the labor market eventually turns positive, it will do so with a vengeance.”- Bob Stein, senior economist, First Trust Advisers
The International Monetary Fund raised its forecast for 2010 global economic growth to 3.1% from 2.5%.
September US car sales - General Motors posted a 45% drop in September US light-vehicle sales, while Chrysler's sales fell 42%. Ford saw a much more modest drop of 5.1%. Among Japanese auto makers, Toyota said its September US sales declined 16% from a year earlier, while Nissan saw its results fall 7% and Honda said its sales slid 23%. (Seems to me that GM and Chrysler’s problems are more related to product choice and quality than incentives…)
The ISM Manufacturing index fell short of consensus expectations, but remained above 50, signaling expansion. An average of 52.8 over the past two months is the highest since 2006. According to the Institute, an index reading of 52.6 is consistent with an annual rate of real GDP growth of 3.6%. (Given the impact of the recession and how low the overall index was several months ago, the fact that the index is above 50 for two straight months is a very positive sign.)
According to Crane Data LLC, nearly 78% of taxable money-market funds, the traditional parking place for savings, are offering 0.1% or less in annualized yield. On a $10,000 balance, that will earn you a maximum of 83 cents -- yes, $0.83 -- in monthly interest income. All told, these funds hold $1.3 trillion. (As noted, these “parking places” are for emergency funds and other short-term needs only – they should not be considered as a long-term investment…)
The 30-year home mortgage rates were the lowest since the week ended May 22, at 4.81 %, after hitting an all-time low of 4.61% in March, according to the Mortgage Bankers Association. (Rates a year ago averaged 6.33%.)
Perspective
“Continuing recovery – NOT a prelude to collapse”
Jim Cramer, the quiet fellow seen on CNBC, put what’s going on in the markets right now rather well I thought when he said this week that, “the fundamentals of the economy are simply canceling each other out. Depending on their perceptions, an investor can make both bullish and bearish cases for the market, depending on which reports they choose to emphasize. This is pushing and pulling stocks in different directions, as each side acts on the data it deems most important. That’s why we can go from relapse to recovery in a single day.”
There’s also something else helping to move/support the markets.
There remain a large number of professional money managers who totally missed the rally and have continued to wait for the drop they’re sure “has to come.” With two positive quarters now in the books, and no drops of substance over that time, these folks are desperate to catch up with their benchmarks. (Benchmarks being the stock indexes that their efforts are compared with.) Since 78% of managers have outperformed the S&P 500 so far this year, they don’t want to be in that bottom half. No one will want to have them manage their money for them. So, these managers are scrambling to be picking up stocks every time the market pulls back.
Let’s consider some facts that make this market NOT at all like the 30s environment that the media is currently suggesting we resemble. They didn’t get the depression they were hyping a year ago – I guess this is their fallback.
The markets initially recovered from the crash in 1930 when President Hoover signed an income tax reduction bill into law. However, against the advice of economists and his advisors, in 1931, he then signed into law the trade protectionist Smoot-Hawley tariff act. That then led directly to the subsequent cratering of both the economy and the markets. So far, the DC crowd hasn’t gone to those extremes and there’s nothing on the radar that suggests that type issue is out there…for now.
So, why should this V-shaped recovery continue? Some of the reasons are noted above. For example, the ISM Manufacturing numbers improvement. Inventories have dropped too low and that is being reflected in new orders and production. Consumer spending is up – and not due to any “stimulus”. Residential construction increased 4.7% in August –that’s the strongest month since 1993! Small business incomes are up on a 7.6% annualized basis – that’s big.
Tax hikes and inflation won’t be in evidence next year and both can still be dealt with in a transitional manner that would prevent the pulling out of the economic rug.
Sure, we could have a correction. So? That’s all part of a normal market rotation and there’s lots of folks waiting for that just to get in the game and not miss out. Wait, you say. What’s to miss out on? We’re up over 50% since March…there can’t possibly be more to go on the upside? Or can there?
I firmly believe that we can go back up to 12,000 on the Dow Jones and 1200 on the S&P 500. That’s about another 40% increase from here and would only put us back to where we were in late 2007. Every post-recession market I’ve been in has seen a recovery that, eventually, went past the previous high so I’m not too far out on a limb here. If the health care, cap and trade and income tax issues can, respectively, be reduced or eliminated, we would likely see higher numbers than these.
Remember – the future’s so bright, you’ll have to wear shades…
All my best,
Mike
509-747-3323
Closing values as of 2 October 2009 /
Dow Jones 9487 S&P500 1025 NASDAQ 2048 Oil $69.73/bbl Gold $1,003.20/oz.
“The record of history is absolutely crystal clear: that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.“ - Milton Friedman (1912 – 2006) American economist; winner of Nobel Prize in Economics
Overview
This last month certainly went a long way toward reinforcing the folly of listening to the conventional “wisdom”.
Remember? “September is bad – watch out. It’s the worst month of the year for the stock market.” Except, of course, like this time when it wasn’t. Here’s something about the markets I constantly have had reinforced to me over the years – if “everyone” is doing it, or believes it, do the exact opposite…
The three major stock indexes had their best quarters in 11 years as both the Dow Jones and S&P 500 had gains of 15% over the most recent three month period. The NASDAQ, home of the major tech and newer growth companies, was up 15.7% over the same time. We don’t see gains like those in most year periods. More manifestation of the V-shaped recovery we’re involved with now.
Now the doomsayers are out saying “well, okay, you were lucky in September. But October? You really better watch out now. Historically, this month is a total giant killer. You’ll probably get totally smooshed this month.” Unless, of course, you don’t.
The point is no one knows what the markets will give you in the short-term. We could continue higher or we could get a correction or they could just slip-slide sideways. They are completely unknowable. However, over the long term, the markets are inevitable in their upward trend.
Tea Leaf Readings
(I use this term to describe quotes from a number of opinion leaders about current market and economic events – what they see happening now and their expectations.)
"We think equities will now trade above my previous target for this year, in large part because earnings will be higher than we previously anticipated.” - Jason Todd, investment strategist, Morgan Stanley (This is significant in that, until last week, he had been predicting that the market would fall 14% from today's levels by the end of the year. Now he’s saying that the S&P 500-stock index is likely to rise somewhat between now and year's end and could be up as much as 15% before it “gets into trouble.”)
"Once again, we will see a lot of companies beating estimates as the earnings season gets going in earnest in October. This time, sales are going to be an even bigger surprise than profits. Sales have been slow to recover as consumer spending has remained muted. Companies have been holding up profits by cutting costs. Now, as the recession shows signs of ending, sales could surprise the analysts, although sales still are likely to be down from a year ago. Stronger-than-expected sales would boost profit margins and give the stock rally fresh fuel. This would also be a welcome sign that earnings are being driven by customer demand and not cost cutting.” - Jeffrey Kleintop, chief market strategist, LPL Financial
"The outlook for global equity markets will stay favourable over the next months — further price gains are expected, driven by higher multiples and a recovery in earnings. An increase in new company orders and industrial production are positive impulses for corporate profitability.” - Gerhard Schwarz, head of global equity strategy, UniCredit
The latest weekly survey by the American Association of Individual Investors found that bearishness among investors stood at 44.5%, above the long-term average of 30%. Many of those investors are still drifting to what they perceive as safer investments. In August, investors moved $42.9 billion into bond funds and only $3.9 billion into stock funds, according to the Investment Company Institute, the mutual fund trade group. (Please note my comments in the overview. The stock market often rewards the contrarian; so many analysts see investors' doubts as one of the strongest signals that the rally will continue.)
“There are positive economic surprises that are going to come in the rest of the fall. That’s what the leading economic indicators and markets are telling us. Today’s positive feedback loop is a mirror image of the negative feedback loop during the fall and winter of last year. Better economic numbers lead to better corporate earnings outlook, which leads to rising corporate and bond prices which in turn improves balance sheets and more economic growth.” - John Merrill, founder/CIO, Tanglewood Wealth Management
"I think we're starting a 10-year bull market. During that time, the Dow will double for sure from current levels. Stocks are the only reasonable money-making investment in this current environment of low interest rates. Why put your money into a 30-year U.S. government bond at 4% and wait 30 years to get your money back? Instead, buy the Dow Jones Industrial Average. The 30 components are yielding a 3% dividend and, unlike Treasuries, offer a growth opportunity. Plus, with trillions in cash on the sidelines waiting to get in the game, the market's headed in one direction: Up.” - Neil Hennessy, chief investment officer, Hennessey Funds
“We’re hitting a little bit of a soft spot in economic growth. We would not be surprised to see a 5% plus pullback in the marketplace. I still think we’ll be higher by year-end as third- and fourth-quarter economic growth and corporate earnings outpace expectations.” - Michael Mullaney, money manager, Fiduciary Trust Co.
"Economic data rarely move in a consistent pattern. We should not be surprised that there are bumps in the road. Unfortunately, investors want the latest data to always be better than the previous ones and that is unrealistic. Thus, they react wildly." - Joel Naroff, Naroff Economic Advisors
“Don’t confuse the economy with the stock market. We’re in the beginning of a new bull market and you can’t confuse backward looking jobless numbers with the stock market.” - Jordan Kimmel, market strategist, National Securities
Economic reports from the past week (with occasional translations…)
“The employment situation has remained much weaker much longer than the overall economy. In September, the jobless rate rose to the highest level since 1983. There are two reasons for the disconnect between the economic recovery and the labor market. (Unemployment numbers are always the last indicator to turn for the better.)
First, productivity growth has been rapid of late, part of the ongoing process of technological change that rivals (and may surpass) the industrial revolution. Second, corporate leaders still think the recent spurt in growth will be short-lived and so are being overly cautious. In the short term, productivity growth lets companies raise production even as they continue to cut jobs. Over time, though, higher output with lower labor costs mean more profits, which will help stimulate rapid job growth once companies become more confident about the staying power of the recovery. When the labor market eventually turns positive, it will do so with a vengeance.”- Bob Stein, senior economist, First Trust Advisers
The International Monetary Fund raised its forecast for 2010 global economic growth to 3.1% from 2.5%.
September US car sales - General Motors posted a 45% drop in September US light-vehicle sales, while Chrysler's sales fell 42%. Ford saw a much more modest drop of 5.1%. Among Japanese auto makers, Toyota said its September US sales declined 16% from a year earlier, while Nissan saw its results fall 7% and Honda said its sales slid 23%. (Seems to me that GM and Chrysler’s problems are more related to product choice and quality than incentives…)
The ISM Manufacturing index fell short of consensus expectations, but remained above 50, signaling expansion. An average of 52.8 over the past two months is the highest since 2006. According to the Institute, an index reading of 52.6 is consistent with an annual rate of real GDP growth of 3.6%. (Given the impact of the recession and how low the overall index was several months ago, the fact that the index is above 50 for two straight months is a very positive sign.)
According to Crane Data LLC, nearly 78% of taxable money-market funds, the traditional parking place for savings, are offering 0.1% or less in annualized yield. On a $10,000 balance, that will earn you a maximum of 83 cents -- yes, $0.83 -- in monthly interest income. All told, these funds hold $1.3 trillion. (As noted, these “parking places” are for emergency funds and other short-term needs only – they should not be considered as a long-term investment…)
The 30-year home mortgage rates were the lowest since the week ended May 22, at 4.81 %, after hitting an all-time low of 4.61% in March, according to the Mortgage Bankers Association. (Rates a year ago averaged 6.33%.)
Perspective
“Continuing recovery – NOT a prelude to collapse”
Jim Cramer, the quiet fellow seen on CNBC, put what’s going on in the markets right now rather well I thought when he said this week that, “the fundamentals of the economy are simply canceling each other out. Depending on their perceptions, an investor can make both bullish and bearish cases for the market, depending on which reports they choose to emphasize. This is pushing and pulling stocks in different directions, as each side acts on the data it deems most important. That’s why we can go from relapse to recovery in a single day.”
There’s also something else helping to move/support the markets.
There remain a large number of professional money managers who totally missed the rally and have continued to wait for the drop they’re sure “has to come.” With two positive quarters now in the books, and no drops of substance over that time, these folks are desperate to catch up with their benchmarks. (Benchmarks being the stock indexes that their efforts are compared with.) Since 78% of managers have outperformed the S&P 500 so far this year, they don’t want to be in that bottom half. No one will want to have them manage their money for them. So, these managers are scrambling to be picking up stocks every time the market pulls back.
Let’s consider some facts that make this market NOT at all like the 30s environment that the media is currently suggesting we resemble. They didn’t get the depression they were hyping a year ago – I guess this is their fallback.
The markets initially recovered from the crash in 1930 when President Hoover signed an income tax reduction bill into law. However, against the advice of economists and his advisors, in 1931, he then signed into law the trade protectionist Smoot-Hawley tariff act. That then led directly to the subsequent cratering of both the economy and the markets. So far, the DC crowd hasn’t gone to those extremes and there’s nothing on the radar that suggests that type issue is out there…for now.
So, why should this V-shaped recovery continue? Some of the reasons are noted above. For example, the ISM Manufacturing numbers improvement. Inventories have dropped too low and that is being reflected in new orders and production. Consumer spending is up – and not due to any “stimulus”. Residential construction increased 4.7% in August –that’s the strongest month since 1993! Small business incomes are up on a 7.6% annualized basis – that’s big.
Tax hikes and inflation won’t be in evidence next year and both can still be dealt with in a transitional manner that would prevent the pulling out of the economic rug.
Sure, we could have a correction. So? That’s all part of a normal market rotation and there’s lots of folks waiting for that just to get in the game and not miss out. Wait, you say. What’s to miss out on? We’re up over 50% since March…there can’t possibly be more to go on the upside? Or can there?
I firmly believe that we can go back up to 12,000 on the Dow Jones and 1200 on the S&P 500. That’s about another 40% increase from here and would only put us back to where we were in late 2007. Every post-recession market I’ve been in has seen a recovery that, eventually, went past the previous high so I’m not too far out on a limb here. If the health care, cap and trade and income tax issues can, respectively, be reduced or eliminated, we would likely see higher numbers than these.
Remember – the future’s so bright, you’ll have to wear shades…
All my best,
Mike
509-747-3323
Closing values as of 2 October 2009 /
Dow Jones 9487 S&P500 1025 NASDAQ 2048 Oil $69.73/bbl Gold $1,003.20/oz.
Wednesday, September 30, 2009
Market retrospective - week of 25 September 2009
Contents: Overview; Tea leaf readings; Economic reports; Perspective, “The four prosperity killers”
“In democracies, nothing is more great or more brilliant than commerce: It attracts the attention of the public and fills the imagination of the multitude; all energetic passions are directed towards it.”-- Alexis de Tocqueville (1805 – 1859) French political thinker and historian
Overview
I was interested to read today that now October would be the month for market uncertainty. I guess since it doesn’t look as if the doom sayers will get their wish for “another terrible September”, they’ll keep rolling it one month forward until the market cooperates to some extent and we get a correction of one type or another.
Even with the averages off slightly this week, all three of the major equity indexes remain up for the month September, bucking the historical trend. Kind of like Y2K – lots of smoke but no substance…
This will be the last week of the month and the quarter. It seems reasonable to expect some volatility over these next few trading sessions as the professionals try to make their portfolios look as good as possible – a process known as window dressing – and the rest of us try to position ourselves for the coming earnings reports.
Year over year earnings comparisons should be fairly good for the next couple quarters. What will determine how well the individual stock prices react will be if the analysts decree that the earnings are “better than expected” – or not. Those that outperform will see their prices rise while the others won’t do as well.
Recall that these reports are simply 3 month snapshots and that three months do not a trend make. If the earnings “disappoint” – another quaint Wall Street frame of reference – determine if there’s a fundamental change in the company causing this or if they’re just late to the recovery party before making any trading decisions.
I still see us moving higher overall – and not just short-term…
Tea Leaf Readings
(I use this term to describe quotes from a number of opinion leaders about current market and economic events – what they see happening now and their expectations.)
"The March lows were a once-in-a-generation selling climax from which stocks will gradually move higher. There is certainly considerable upside left." - Richard Ross, global technical strategist, Auerbach Grayson
"Not that I place so many IPOs (initial public offerings of company stock), but it interests me because it's a very positive sign for the market. We went through practically a year without any IPOs, the reason being because there was no appetite for them. Because these companies and brokerage firms see there's a market, that's very encouraging." - Uri Landesman, head of global growth strategies, ING Investment Management (This week saw the most IPOs since December, 2007.)
"Clearly most investors are still sacred to death and I would not cite this as a reason to call the market frothy or scary. It's definitely a sign of a little confidence peeking back, in what I'm calling the second phase of the bull market. The first phase was just a reflection off the bottom, the second being a little more investment confidence." - Jordan Kimmel, market strategist, National Securities
“The news is getting much better, the earnings revisions have been superior over the past couple of weeks and I think there are a lot of good things going on in the credit market. We expect the S&P to finish at 1,130 by the end of the year and to continue to challenge the all-time highs in the next couple of years. We encourage investors to put money to work before the end of the year.” - Ted Parrish, co-portfolio manager, Henssler Equity Fund
“There’s a little bit of a wall of worry right now, but the market just feels like it wants to go up. There’s going to be a very strong near-term economic rebound greater than expectations. I think we’ll end the year higher.” - Michael Mullaney, fund manager, Fiduciary Trust Co.
"There could not be a more lucid anecdotal example of the large amounts of speculative dollars that are flowing through the commodity markets. We all know what happens when a trend becomes too obvious. It is usually weeks away from collapsing in on itself." - Mike O'Rourke, chief market strategist, BTIG (In response to a question about why oil is rising in the face of increasing inventories and low demand.)
Economic reports from the past week (with occasional translations…)
US Federal Reserve Bank stated that “economic activity has picked up,” a clear sign that it thinks the recession is over. It also said “activity in the housing sector has increased,” an acknowledgement that home sales and housing starts are off the lows set early this year and unlikely to return to those levels.
Most notably, the Fed said policy measures and market forces “will support a strengthening of economic growth and a gradual return to higher levels of resource utilization.” This language implies two important ideas. First, the Fed believes the economic recovery is going to accelerate. Second, it believes the economy may soon grow rapidly enough to push down the unemployment rate and generate increases in employment.
The index of leading economic indicators, which is supposed to forecast economic trends six to nine months ahead, rose for a fifth straight month in August, to the highest level since January, 2008. – The Conference Board
Nearly three-quarters of workers say they have “less than a complete understanding” of their employer’s retirement savings plan, with most indicating that they have a better grasp of other benefits, such as health care coverage and life insurance.
The survey of 1,019 adults, conducted in April, found plan participants turn most to their employers for retirement savings advice (22 percent). Participants also seek advice from financial advisors (15 percent), spouses (13 percent), immediate family (12 percent), the Internet (9 percent) and retirement plan providers (7 percent), according to the survey. - Jamie Ohl, senior vice president, Hartford Retirement Plans Group
Existing home sales fell in August, partially offsetting the huge upward spike in July. This was the first decline in existing home sales since March but, were it not for the unusual surge in July, the March pace of sales would have been the highest since the financial panic started in September, 2008.
New home sales increased for the fifth consecutive month in August and are well off the lows established early this year. Although the pace of sales in August did not increase quite as much as the consensus expected, sales in earlier months were revised up slightly. Part of the rise in sales is probably price related. Median new home prices fell 9.5% in August; the largest monthly drop on record. As builders compete with more foreclosed properties and short-sellers, they have cut their prices to compete effectively. Given demographic trends, we anticipate that over the next few years the annual pace of new home sales will climb from 429,000 in August to roughly 950,000. – Brian S. Wesbury, chief economist, First Trust
Orders for durable goods were weaker than the consensus expected in August, but the weakness was concentrated in aircraft orders, which fell 30% and are typically the most volatile portion of the report. For example, just last month, aircraft orders increased 25%. Given this volatility, the decline in overall orders is not nearly as concerning as if it had been mostly due to other, less volatile, sectors. Orders are still up at a 4.4% annual rate in the past three months and up at a 14.8% rate excluding transportation. – US Department of Commerce
The $1.25 trillion of purchases of mortgage-backed securities will be extended into next year in order to help financial markets adjust. Overnight lending rates will be held at close to zero percent and the intention is to keep rates exceptionally low for an extended period. Economic activity has picked up following its severe downturn and the Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook. – US Federal Reserve Open Market Committee
Perspective
“The four prosperity killers”
Arthur Laffer is an economist whose work was first noticed in the 1980s. He put forth something called the Laffer Curve. In effect, he proposed that lowering tax rates would actually raise tax revenues. This was proven during the Reagan years.
He has also put forth what he terms – and I think rightly so – the four killers of prosperity in an economy like ours. He has identified the following as the killers. They are:
1. Rising tax rates 2. Inflationary money 3. Trade protectionism 4. Government control/re-regulation
Rising tax rates – Given the amount of money the programs put forth by the current administration are projected to cost, it doesn’t seem likely that the low rates we’ve enjoyed for over 25 years will be able to be maintained. With higher rates comes diminished productivity and a disincentive to be productive. When we were languishing in the 70s, the top personal tax rate was 70%. Most people who actually paid taxes were in about the 50% range. The goal became how to find ways to shield your income from tax – economic benefit or not.
Inflationary money – Printing money to provide liquidity to help the economy recover was a necessity, in my opinion. To keep printing money to provide for programs of dubious value, extreme cost - and not of the one-time variety – and wide-reaching effect, is setting a trap for the economy. Inflation is a hidden tax that erodes the values of personal assets and raises the risk of a comfortable retirement – especially for those on fixed incomes.
Trade protectionism - This administration, not unlike the one in the mid-70s, seems to have little clue about the economy, business and how they interact. Global trade is a fact and the reality we live in. To raise anti-trust issues with an entity who is a major trading partner in order to placate a few tire workers is folly, to be polite. It, along with other choices, makes us look petty and stupid to our global partners. There is no point, reason or benefit to protectionism - ever.
Government control/re-regulation – And this is needed for what reason again? By the time the government dithers around deciding how to control or regulate something, the cause for that has usually been eliminated by the natural forces of the markets. Some controls and regulations are essential but the heavy hand has no benefit to either producer or consumer. Look at the European Union as the prime example. That entity has so gummed up the normal flow of things that efficiencies and productivity have no place in their realm. The only ones who benefit from increased regulation is the government itself. Have you ever heard of a bureaucracy that actually ceased to exist, once it got started??? In this country, we call them entitlement programs…
We can still be prosperous, productive and improve our living standards if we resist the intuition of these four killers into our markets and economy. There’s no need to go backwards…
All my best,
Mike
509-747-3323
Closing values as of 25 September 2009 /
Dow Jones 9665 S&P500 1044 NASDAQ 2090 Oil $66.09/bbl Gold $990.00/oz.
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