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.