My Wall Street Guy

Market retrospective - weeek of 6 November 2009

m.maehl@opus111group.com (Mike Maehl) — Mon, 09 Nov 2009 19:26:00 +0000

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

Market retrospective - week of 30 October 2009

m.maehl@opus111group.com (Mike Maehl) — Mon, 02 Nov 2009 17:09:00 +0000

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

Market retrospective - week of 23 October 2009

m.maehl@opus111group.com (Mike Maehl) — Mon, 26 Oct 2009 14:06:00 +0000

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

Market retrospective - week of 16 October 2009

m.maehl@opus111group.com (Mike Maehl) — Wed, 21 Oct 2009 15:08:00 +0000

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

Market retrospective - week of 9 October 2009

m.maehl@opus111group.com (Mike Maehl) — Mon, 12 Oct 2009 15:33:00 +0000

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

Market retrospective - week of 2 October 2009

m.maehl@opus111group.com (Mike Maehl) — Mon, 05 Oct 2009 13:34:00 +0000

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.

Market retrospective - week of 25 September 2009

m.maehl@opus111group.com (Mike Maehl) — Wed, 30 Sep 2009 14:59:00 +0000

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.

Market retrospective - week of 11 Sept 2009

m.maehl@opus111group.com (Mike Maehl) — Mon, 14 Sep 2009 13:26:00 +0000

Contents: Overview; Tea leaf readings; Economic reports; Perspective, “Why putting all/most of your money in bonds is a bad idea”

“Some see private enterprise as a predatory target to be shot, others as a cow to be milked, but few are those who see it as a sturdy horse pulling the wagon.”-- Sir Winston Churchill, KG, OM, CH, TD, FRS, PC (1874 – 1965)

Overview

We had a nicely positive short week as everyone tried to get back in the saddle after summer vacations. On the 10th, at the end of five up days in a row, we set the highs for the year in all three major equity indexes. On Friday, all three indexes were down almost imperceptibly, as in less than ¼ of 1% at worst and yet the headline writer chose to say that the five day run was “snapped.” Somehow, that kind of drop and snapped don’t seem to fit. Now, if it had been a couple hundred points? That might qualify as snapped.

The Standard & Poor's 500 index is up 54.3% since hitting the low in March and is the second best performing index of the year. The NASDAQ with its tech and new growth companies is far and away the leader, being up 32% for the year. The Dow is up “only” 9.5% this year. In none of these does it appear that anything, other than the ties with the past bad market, has been snapped.

Daily trading volume continues to be light. That’s because there’s really not much new significant news to motivate the big money players. They’re either waiting for the “bad” September to show up (so they can get in, but at lower prices) or they’re just sitting on their money until October and the next round of earnings reports come in. Personally, I think it’s more the latter.

I read something this week that some poll or another found that 87% of investors still don’t believe that the economy is getting better. (Obviously, those are other than the people who read this weekly rant…)

87% is a bunch. Logically, I don’t understand why that number is so high – I really don’t. The economic reports and trends are definitely positive. However, I think it’s fair to say that most people don’t know (or care much) about how the markets and economy fit together. So, when looked at emotionally, and understanding that their “information” is based on inputs provided by the media and the current geniuses in DC, it makes sense. If those groups don’t paint a bleak picture, it’s hard to get the public to buy off on their doomsday prophecies.

As Nobel Prize-winning economist James Buchanan recently observed, politicians (and their media enablers, I believe) lack "any basic understanding of what makes capitalism work."

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.)

“When markets of any type are in transition, you get ‘pinch points.’ At these times, things can seem overly positive or negative, depending on the direction of the trend, until the markets break through.” – Scott St. John, VP, American Pacific Mortgage, Freddie Mac Advisory Board member

“Students who get into more selective colleges are more likely to graduate from them than their peers who attend less-selective schools. At the University of Massachusetts, for example, only 33% of freshmen who enter graduate within six years. Only half of students who enroll in college nationwide end up with a bachelor's degree, a key reason why US inequality has soared in recent decades.”- David Leonhardt, Writer, The New York Times (But at least, thanks to our education system, they feel good about themselves…)

“A lot of people are underinvested in this market and we’ve been climbing a wall of worry all year long. We view this as a significant turning point and maybe the early stages of a longer-term bull market. We expect the S&P 500 to reach 1,200 by year-end.” - Art Nunes, market strategist, IMS Capital Management

“Stocks [will] continue to lead the economy and the stock market is telling us that the economic bottom is in place—now the engine of growth has to come back in and 2010 is going to be the year of the “show me” period. In between there though, we believe stocks go higher, the economy recovers and equities will be the place to be. I expect the S&P to reach 1,120 over the next 12 months.” - Brian Belski, chief investment strategist, Oppenheimer & Co.

“Uncertainty in the markets has led to confusion for some as to whether to buy in or get out. I'm still cautious; people go broke trying to predict the day. There are too many conflicting signals. There's too much government in the markets for me. But you can't buck the trend, you don't want to sell here, but keep your eye on the exit door. You have to be in this market. Things could turn around real quick." - Gordon Charlop, analyst, Rosenblatt Securities

"Don't forget, the retail investor is usually wrong when it comes to the market. Unfortunately, if you follow the sentiment survey by the AAII, (American Association of Individual Investors), it appears your average retail investor has been on the wrong side of this entire rally. To have seen a greater than 50% rally from the lows and the retail investor still doubting the rally gives me confidence that this rally still has legs.” - Ryan Detrick, senior technical analyst, Schaeffer's Investment Research

"To me, the plunge from late last year until March was hedge funds panicking out and most of the rally since was hedge funds reversing their shorts. That's a very professional trading market. Retail investors are just not participating. People have been trying to pick a top for two months. When that kind of attitude prevails, it usually means the market is going to press higher to punish the bears." - Phillip Roth, chief technical market analyst, Miller Tabak

*Analyst comments on Wednesday speech about the health plan. (The prospect of dramatic overhaul of the healthcare system has pressured health insurer shares throughout the year.)

“We’ve betting on the fact that we’re not going to see a broad, nationalization of health care—we believe stocks are clearly priced for nationalization.” - Brian Belski, chief investment strategist, Oppenheimer & C0.

“The speech contained nothing unexpected. There wasn't anything said that is drastically changing the outlook as to what might come out of Congress." - Steve Shubitz, analyst, Edward Jones

"I am even more confident after the Obama speech that the legislative outcomes will be moderate with no threat of a Medicare-like public plan." - Ana Gupte, analyst, Sanford Bernstein

"While we understand the negotiating logic of keeping it on the table for now, we still don't see any higher/better odds that a full fledged public plan can ever make it into a final piece of legislation."- John Rex, analyst, JP Morgan

Economic reports from the past week (with occasional translations…)

US mortgage applications surged last week to their highest since late May. Rates on 30-year fixed-rate mortgages tumbled to a 3-month low, spurring a surge in demand for home refinancing loans. Applications to buy a home, a tentative early indicator of sales, also climbed, hitting their highest since early January. - Mortgage Bankers Association

Half of the 12 districts saw evidence the US economy had improved by the end of August, although labor markets remained weak and retail sales were flat. Dallas, Boston, Cleveland, Philadelphia, Richmond and San Francisco noted gains. Other areas reported the economy was stable or showing signs of stabilization, while St. Louis said the pace of economic decline appeared to be moderating. – Federal Reserve Bank Beige Book report

“The US government's sweeping intervention in the private sector has taken its toll on the country's competitiveness. The country lost its number one spot to Switzerland partly because of ‘particular concerns on the part of the business community about the government's ability to maintain arm's-length relationships with the private sector and in the perception that the government spends its resources wastefully.’" – World Economic Forum annual survey (It’s even clear from overseas…)

“Confidence rebounded in early September as consumers increasingly expected the economy to improve despite their reluctant conclusion that their own financial situation would remain quite problematic for some time. The 12-month economic outlook index rose the highest since September, 2007.” - Reuters/University of Michigan Surveys of Consumers

“Imports rose 4.7%, the largest monthly advance since 1992 and the second consecutive gain after 10 straight declines. The rebound reflected a 21.5% spike in imports of autos and auto parts, partly due to increased production at US auto plants owned by General Motors and Chrysler. Exports edged up 2.2 %, marking the third straight monthly increase. The export gains reflected big increases in shipments of civilian aircraft, computers, industrial machinery and medical equipment. – US Department of Commerce

Perspective
“Why putting all/most of your money in bonds is a bad idea”

87% of investors don’t think the markets or economy are in good shape. Further, a number of so-called advisors are providing the ultimate in rearview mirror based investing “advice” by looking at the stock market record of the last 10 years as an indicator of what’s to come. And, of course, as “everyone knows”, bonds are “safe.”

Bonds are an important component of an effective asset allocation strategy and, there are elements of truth in all three positions – but they are minimal at best. Let’s try another perspective or two and look at the last thought first.

Almost all bonds (98%+, I’m thinking) issued by reputable companies and governmental agencies at the Federal, State, county or municipal levels are, in fact, quite safe. Most people think that it’s safe if you get back the same number of dollars when the bond comes due as you put in at the outset. For very short-term goals of three years or less, that’s usually a pretty good idea. Using bonds to fund longer-term goals can be quite a painful learning experience – and you don’t learn until the back-end, to make it even worse. Here’s the main reasons why.

If – and as certainly looks likely in our current situation – interest rates and inflation rates rise over the time you hold the bond, you will lose buying power. In American, that means that that you’ll get the same number of dollars back BUT they won’t buy you as much as they did when you put the money to work. Definitely not a good thing.

The other reason has to do with what happens to the value of the bond while you hold it. What if a situation comes up where you need – or want – some money before it comes due? Contrary to conventional wisdom, bonds do, in fact, go up and down in price. What makes them move is the direction of interest rates take after you invest. The rule of thumb is that if interest rates rise while you hold the bond, the value will drop – regardless of credit rating. The opposite is true as well. The longer the time until the bond is due, the more likely you’ll see larger moves in the value. Your payments don’t change.

The last 10 years – primarily due to last year – have the S&P 500 down about 24%. Why would anyone sign up for that? Depends on your time line for a particular goal. Over the past 20 years, the S&P has had an annual average (operative term) rate of return of better than 8%. In this country, since the 1920s, NO other investment has had a better average annual rate of return over time than the stock market. There will be others that will probably do better in any one year but it’s consistency that’s the key to long-term results.

The real answer is that you need a program to manage your investments that will include stocks, bonds and other investments. There is NO one size fits all – contrary to what the media, web sites or magazines would have you believe. Those are all based upon averages.

The truth is that, not unlike other important areas of your life, you need a trusted advisor to help you get to where you want to go in the manner you want to get there – not what an article or software has said.

If you have a trusted advisor, good for you. If you don’t or – like the docs – would like a second opinion, please call on me.

All my best,

Mike
509-747-3323

Closing values as of 11 September 2009
Dow Jones 9605 S&P500 1042 NASDAQ 2080 Oil $69.32/bbl Gold $1,007.00/oz

Market retrospective - week of 4 September 2009

m.maehl@opus111group.com (Mike Maehl) — Wed, 09 Sep 2009 20:17:00 +0000

Contents: Overview; Tea leaf readings; Economic reports; Perspective, “Should we be tapping the brakes?”

“We have tried spending money. We are spending more than we have ever spent before and it does not work. . . . After eight years of this administration, we have just as much unemployment as when we started . . . and an enormous debt to boot!” – Said in 1939 by Treasury Secretary Henry Morgenthau, (1891 – 1967), after a doubling of federal spending failed to relieve the Great Depression.

Overview

I don’t know why the media is so bent on making September look like some black hole for the market. (See Sam Stovall in the first Tea Leaf entry.) Maybe it’s because we didn’t get the depression they wanted for us last year and then the markets have come back much this year – in spite of their constant reminders to “watch out”. To be fair, lot of pros are still way behind the curve on this too…and many of them are trying to jawbone it down as well.

Let’s consider some longer-term investment data using the S&P 500 Index as representing the stock market.

Over the past 10 years, we’re down 24.5% - due almost entirely to 2008. Over the past 20 years, we’re up 8.2%. If you invested $1 in 1926 - and adjusting for inflation and taxes – you would have had $2,270 through the end of July, according to Ibbotson Associates. You want really long term? According to the Center for Retirement Research at Boston College, after inflation, from 1883 through 2008, the stock market has averaged a return of 7.6%...maybe a little better as of now.

The point is that worrying about a month in the greater scheme of things doesn’t really make mush difference.

Short-term, the markets are unknowable. Long-term? They’re inevitable.

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.)
“Since 1929, the S&P 500 index has lost an average 1.3% in September. But, the index has gained about 2% in the 14 Septembers that followed the end of bear markets.” - Sam Stovall, chief investment strategist for U.S. equity research, S&P (So, if by month end we get that average drop, we’d still be up 11.2% for the year – hardly anything to worry about.)

"Food is driven by upwardly mobile population growth worldwide. Infrastructure is driven by increasingly wealthy nations building better infrastructure to both help their citizens and stay globally competitive. The drivers of increasing global demand for both are incontrovertible." -Stephen Roseman, CEO, Thesis Capital hedge fund

“After a 50% move, there is still a question of ‘is it a bull market?' I continue to see skepticism concerning the market from both Wall Street strategists and commentators--this is a positive. As I have been saying since late March, this is a new bull market that, as far as trajectory, the current experience most closely resembles the bull market that began in 1982 and that market did not have its first correction until 424 days. The bearish case is always more intelligent and more articulate as it is looking at current events and current data, while the bullish case is looking at what is yet to come, not what has been.

First, history tells us that employment is ALWAYS a lagging indicator and that it is the last of the economic indicators to pick up once the economy picks up; that it will continue to rise does not really tell me anything that I, nor the market, does not already know. The only thing limiting banks to lend, households to spend and companies to invest is sentiment.” - Jeff Rubin, head of research, Birinyi Associates (I think he nails it in his last sentence.)

“The stimulus is not failing because it is too small or because too much of it is being saved. It’s failing because Congress can only redistribute existing demand, not create new demand. This recession will eventually end. The more serious, long-term danger is that President Obama’s Europeanization of the economy will bring the same slow growth, stagnant wages, job losses, high taxes, and lack of competitiveness that have plagued Western Europe, leaving the United States at an ever-growing disadvantage with Asian countries not so afflicted.” – Brian Riedl, Senior Research Fellow, Heritage Foundation

“Financial markets will probably remain in this sweet spot for some time. While the economic data have almost uniformly surprised on the upside, the leading central banks have credibly signaled to the markets that monetary conditions are set to remain extremely accommodative. Stocks will benefit as growth picks up and bonds will be helped by central bankers’ reluctance to lift borrowing costs.” - Riccardo Barbieri, Head of international economics, Banc of America Securities-Merrill Lynch (Riccardo makes a lot of sense with this.)

“It's too early for the unemployment rate to be coming down. Of course we're still losing jobs. What I would take encouragement from is the fact is the trend in the rate of decline in jobs is still improving." - Nigel Gault, chief US economist, IHS Global Insight

Economic reports from the past week (with occasional translations…)

“No one likes it when the unemployment rate hits a new high, which it did in August. But the details of the employment report are much better than the rise in the jobless rate suggests. Private-sector payrolls declined 198,000 in August, which is the smallest drop in a year. In addition, private payrolls were revised up slightly in June/July. What makes this even more remarkable is that the federal government increased the minimum wage in late July, so August was the first month that reflected job losses related to this forced wage hike. Right on cue, employment among teenagers fell 150,000 in August (seasonally-adjusted).

The second good sign for the labor market is that broad measures of wages seem to be rising again. Average hourly earnings went up 0.3% for the second straight month, the largest gains so far this year. The economy is in a V-shaped recovery. Given the deepness of the recession and the fact that employment tends to be a lagging indicator, it will take time for the economic recovery to translate into job gains, but we believe payrolls will start expanding by the end of this year and that the unemployment rate will not be going to 10%+ as the consensus expects. Corporate profits were up at a 24% annual rate in the first half of 2009, suggesting businesses have re-built the ability to expand payrolls.” – Brian S. Wesbury, chief economist, First Trust (Responding to news of the US unemployment rate having moved up to 9.7%. FWIW, I strongly agree with his premise.)

“The Federal Reserve has made $14 billion in profits on loans made in the last two years. The US central bank also earned about $19 billion from interest and fees charged to institutions that tapped liquidity facilities during the global financial crisis. If the Fed had invested the same amounted loaned out in three-month Treasury bills since August 2007, it would have earned only $5 billion in interest.” – Financial Times, London

“Asian markets are more closely tied to the S&P 500 than to China's Shanghai Index. There is very little direct correlation between percentage changes in the Chinese equity markets and the rest of Asia. China is a closed stock market, driven primarily by domestic concerns, as opposed to the US markets. Now, if we were to look at the rest of markets in Asia, their drive and their movements will be much more correlated with the S&P or the Dow Jones and here is where we are having some of the problems." - Andrew Freris, senior investment strategist, BNP Paribas Wealth Management

“Manufacturing expanded for the first time since January, 2008, while the overall economy grew for the fourth month in a row. The index of national factory activity rose to 52.9 in August from 48.9 in July. A reading above 50 indicates expansion in the manufacturing sector.” - Institute of Supply Management

“Productivity, the amount of output per hour of work, rose at an annual rate of 6.6% in the April-June quarter, the largest advance since the summer of 2003. Economists expected an increase of 6.4%, matching the government's initial estimate last month. Worker productivity is the single biggest factor in determining living standards. Increases in productivity can help boost living standards because companies can increase wages financed by rising output.” – US Department of Labor

“The US economy does not need a second fiscal stimulus package; instead the government should cut spending over the next two years. Most economists in the semi-annual poll were concerned about the outlook for the US government budget. Also, they doubted health-care reforms proposed by the Obama administration would lower costs while increasing access and maintaining quality.” - National Association for Business Economics (NABE) survey

“On a slightly more encouraging note, the average and median duration of unemployment improved, largely the result of back-to-back declines totaling some 624k in the number of people unemployed for 15 to 26 weeks. This indicates that most of the sharp drop in the number of people continuing to collect weekly jobless pay was the result of workers returning to work rather than running out of benefits. If that develops into a trend, overall employment gains should soon follow.” - Nomura Global Economics

Perspective
“Should we be tapping the brakes?”

No one talks about inflation anymore. Consumer prices, what we pay for stuff, and producer prices, what the people who make our stuff pay for their stuff, are both down a ton over the last year. Matter of fact, consumer prices dropped the most in one month since 1949 and the producer prices are down the most since the end of WWII. That’s cool, but it’s kind of misleading as it’s almost all due to how much oil dropped over the past year. ($140 per barrel last July – less than $70 on Friday.)

If we just look at this year, those same prices are up around 2%. The not so good news is that it looks as if it’s going to be going higher. Next year, we’ll probably be okay but come 2011, things can get less comfortable.

The Federal Reserve, in order to keep the economy from tanking, has been putting in a bunch of money (aka, liquidity injections) for over a year now and will continue to do so for “an extended period.” At some point though, they will have be taking money out and letting the interest rates rise. Here’s the problem, in my opinion.

I think the economy is really on its way back in a major way and we are on the verge of a V-shaped recovery – in spite of current fiscal policies that, shall we say, aren’t designed to boost growth – which will create a very nice boost in our GDP. If the brakes, in the form of steadily higher interest rates, are applied now, we can get the benefit of less inflation.

Higher rates don’t automatically equate with an end to our recovery. In 1982, when we were pulling out of a really tough recession (10.8% unemployment for 10 months running), the Federal Funds rate (0.00% – 0.25% today) was 8.50%. In mid-1984, it was 11.5% and the recovery kept going.

The point is that the sooner we start raising the rates, the better off we’ll be longer-term. Like raising taxes doesn’t create economic growth, neither is easy money a good long-term stimulant for the economy. The longer the wait, the tougher it’s going to be all around.

The good times keep on coming…

All my best,

Mike
509-747-3323

Closing values as of 4 September 2009
Dow Jones 9441 S&P500 1016 NASDAQ 2018 Oil $67.70/bbl Gold $994.70/oz

Market retrospective - week of 28 August

m.maehl@opus111group.com (Mike Maehl) — Mon, 31 Aug 2009 16:10:00 +0000

Contents: Overview; Tea leaf readings; Economic reports; Perspective, “Wither goes the rally?”

“Increased wages, higher pensions and more unemployment insurance, all are of no avail if the purchasing power of money (caused by inflation) falls faster.” -- Bernard M. Baruch (1870 – 1965) American financier; economic advisor to FDR

Overview

We had another up week for the markets – sort of. It wasn’t exactly a tremendous run as the Dow, which had the best showing of the three major indexes, only gained 0.4% for the week. But – up is up.

Volume has been extremely light as many traders are on vacation now and that adds to the market's recent choppiness.

So, the question is - is the rally over? We’ve had this light trading volume combined with churning, i.e., stocks not really showing direction, over quite a few sessions. You can’t really make much out of it.

Stocks have gone nowhere for the last few days despite better economic news on several fronts. The markets, as they always do, have run up in expectation of these better numbers. And now, some say, we’ll need to see even stronger numbers to move it forward.

This coming week also has some economic reports due out but, as noted, whatever the response by the markets, remember that there aren’t enough players to give a move much credence – up or down.

The best thing to do for this last week of “official” summer is to relax. Making grand pronouncements about market trends or rallies with this type of trading isn’t a good idea….

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.)

“Those of us that live by looking in a crystal ball learn to eat a lot of broken glass.”- Peter Grandich, chief commentator, AGORACOM.com

"There is a lot of money still waiting to participate and it hasn't participated yet. The debate in semantics is whether it is a long-term recovery or not. It's not a crazy rally, it's an inevitable rally. The monetary policy will remain highly stimulative for a protracted period. The fundamentals are that costs have been contained and costs are still ok. You have a cyclical earnings recovery." - Peter Toogood, head of investment, Old Broad Street Research

“I think you have to give this rally the benefit of the doubt for a while. We are up 50% from the lows for the stock market—but from the beginning of last year, we’re still down 25% and over the last decade, we’re still down 10%. So I don’t think just because we’ve had a fast and furious rally, it’s necessarily too much too soon. The earnings surprises so far have come mostly from cost-cutting so there is now some scope for the topline to drive growth.” - Jeff Knight, CIO, Putnam Global Asset Allocation Team

“Equities over the next 12 months are going to be up in comfortably double-digit rates of return. The surprises are all going to be on the upside for growth and corporate profits and that’s going to be keeping the markets going higher.

Additionally, the consumer does not have to come back to revive the economy. In the cyclicals, in the energy, materials, even in industrials, companies that are able to feed into much higher growth overseas and the US growth are going to surprise and be a lot stronger than what people think. So, we don’t need the consumer for the next couple of quarters—the rest of the world will do quite well for us.” - Margaret Patel, portfolio manager, Evergreen Investments

"The upward trend has still not broken. It's too dangerous to fight the trend in the market, even though clearly a lot of people are nervous that it's too extended." - Brian Daley, sales trader, Conifer Securities

“It is time to stop worrying about downside risks and instead to get back to ‘normal’ investing patterns. Investors should give up on holding cash with next to no yield. We don’t want to be worried about the potential pain of a double-dip than the opportunity cost of missing a continuing rally.” - Aaron Gurwitz, head of global investment strategy, Barclays Wealth

“I expect a sell off and expect stocks to pull back in the fall. My year end target for the S&P is 1000. This time of year you tend to get a lot more focus on the coming year and, as you get into the third quarter reporting time frame, you also tend to get a lot more management guidance. I expect third quarter earnings to be ‘decent,’ showing benefits from production increases and cost cutting.

We're not talking about a return to March or anything like that, or the fears of last November following Lehman's collapse, but some correction is probably a good thing in a weird way. You consolidate some of the gains instead of overshooting really badly and instead of suffering bigger losses as people get sucked in at higher prices.” - Tobias Levkovich. chief US equities strategist, Citigroup

Economic reports from the past week (with occasional translations…)

The US will rack up larger budget deficits over the next decade than previously thought, (as in more than the sum of all previous deficits since America's founding – I guess that qualifies as larger). The White House said it now expects the economy to contract by 2.8% this year, steeper than its previous forecast of a 1.2% decline. And the recovery, projected by them to begin later this year, is expected to be “less forceful than previously hoped.” The unemployment rate is expected to peak later this year at around 10% before declining next year. The new deficit projections will push the 10-year deficit forecast up by $2 trillion, to $9.05 trillion. By the next decade's end, the national debt will equal three-quarters of the entire U.S. economy. (Gotta love that change somebody voted for…) - The Office of Management and Budget

The Standard & Poor's/Case-Shiller U.S. National Home Price Index rose 1.4% in the second quarter from the January-March period, the first quarterly increase in three years. Sales of newly built U.S. single-family homes rose for a fourth straight month in July to set their fastest pace since last September, while the inventory of unsold homes fell to the lowest level in 16 years.

Sales rose 9.6% to a 433,000 annual pace, the highest in ten months, and come on top of a 9.1% gain in June. That was the biggest monthly percentage gain since a matching increase in February 2005. – US Commerce Department (The trend is our friend…)

Bookings for durable goods (big ticket items that last 3 years or more) climbed 4.9%, exceeding forecasts and the most since July 2007. Excluding transportation gear, orders increased 0.8%, for a third consecutive gain. – US Commerce Department

Ford said that it would add a third shift to production plants in Michigan and Missouri to meet increased demand for its F-150 trucks and Escape crossover vehicles. The moves offer specifics about Ford's plan to increase production of cars and trucks in the fourth quarter by 33% over 2008 levels to a total of 570,000 vehicles. Ford is gaining market share in the US. (With cars and light trucks (pick-ups and SUVs) being scrapped at a 13+ million annual rate, vehicle sales should grow strongly over the next couple of years - with or without government programs.)

Consumer spending in the US rose in July with a 0.2% gain in purchases. This was in line with forecasts and followed a 0.6% increase in June. - US Commerce Department

US consumer confidence fell to its lowest since April but above economists' expectations and the mood managed to improve from earlier this month.

"Confidence rebounded in late August as consumers increasingly expected improved conditions in the national economy even as they reported the worst assessments of their finances since the surveys began in 1946." - The Reuters/University of Michigan Surveys of Consumers (These are pretty much headline driven. The real sentiment is shown when, how and where money is spent.)

Perspective
“Wither goest the rally?”

I don’t know – not the foggiest. While I’m always in favor of rallies, let me tell you why I think the near-term direction of the markets doesn’t really matter. It’s like weather guessing. It’s going to be what it’s going to be and our views aren’t going to influence it at all…

Let’s agree on one thing at the outset. NObody knows for sure what is going to happen with the markets on a short-term basis. Daily market stuff, such as whether a rally lasts a week or multiple months, is important to traders. To most of us west of the Hudson River, it can be of interest but that’s about it. Since we’re investors, it’s all about trends – the big major moves that influence economies all around the world. Let’s see where we are right now.

Just so you know, perverse as it may seem, a correction – a downward move of 5% to 10% - is a good and very normal part of a bull market trend. So, if – and likely, when – a correction appears, just relax, perhaps put some more money to work, and ride it back up the other side.

The US Commerce Department was kind enough to provide us with reports this week that, to me, reinforce the very positive trends we have going on. In no particular order, let us review…

Durable goods – Over the past three months, total orders are up at an annual rate of 21%. These gains are starting to be translated into shipments – an important component of our GDP. These shipments are already up for the past two months and seem likely to be picking up later into the year. That’s a positive.

Housing –In July, new home sales were up by the biggest amount since 2005 – the peak of the boom. June sales had been up almost as much. Both existing and new home sales are trending up. And now, prices – for the first time in 3 years – are starting up as well. There may be a few more little bumps but the overall trend in this sector of the economy is definitely – up.

Spending and Income – Private sector wages and salaries increased in July for the first gain since last August. Small business income (all types) increased by the most since 2006 in July. Better pay and more demand for labor as the economy picks up suggests hiring is about to pick up.

To me, the trends are all positive and growing more broadly and deeply so each week. All of this suggests the economy and, therefore, the markets will continue to grow for some time to come…corrections or not.

Don’t let the leftover effects of what happened last year prevent you from having the future you want.

All my best,

Mike

509-747-3323

Closing values as of 28 August 2009
Dow Jones 9544 S&P500 1028 NASDAQ 2028 Oil $72.85/bbl Gold $956.70/oz

Market retrospective - week of 21 August

m.maehl@opus111group.com (Mike Maehl) — Tue, 25 Aug 2009 14:00:00 +0000

Contents: Overview; Tea leaf readings; Economic reports; Perspective, “Still improving by the day”

“There is far more danger in a public monopoly than there is in a private monopoly, for when government goes into business it can always shift its losses to the taxpayer. The Government never really goes into business, for it never makes ends meet and that is the first requisite of business. It just mixes a little business with a lot of politics and no one ever gets a chance to find out what is actually going on.”-- Thomas A. Edison (1847 – 1931) American inventor, scientist and businessman (I guess some things never change…)

Overview

Year to date, the Dow Jones is up 8.3%, the S&P500 up 13.6% and the NASDAQ up 28.2%.
Please see the Perspective section for comments this week.

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 the recession is ending right now. The economy may grow by 3% in the next couple quarters and by 1.5% to 2% next year.” - Abby Joseph Cohen, senior investment strategist, Goldman Sachs Group Inc.

“We predict a correction of about 10% but don't think investors should rein in positions. We feel pretty comfortable telling our clients to make sure they're fully invested. A substantial portion of this rally is still yet to come.” - Bruce McCain, head of strategy, Key Private Bank

“Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes. In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: ‘By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.... The process engages all the hidden forces of economic law on the side of destruction and does it in a manner which not one man in a million is able to diagnose.’ “ - Warren Buffett, American businessman (who apparently reads a lot of Edison’s work…)

"It's usually the other way around—everybody expects a rally so much that it never happens. Everybody is now looking for a correction. The question is, is it expected it so much that it gets totally faded?" - Uri Landesman, head of global growth strategies, ING Investment Management (he raises a good point…)

"Unless you're convinced that this rally was entirely an illusion, then you have to look for opportunities to get in. Getting in the middle of a long-term rally is a hell of a lot better than not getting in at all." - Michael Kresh, president, M.D. Kresh Financial Services

"People who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
With real inflationary possibilities down the road, I would much rather own equities at 9000 on the Dow than have a long investment in government bonds or a continuously rolling investment in short-term money." – Warren Buffett (Pay very close attention to this advice…)

"I would say the bank failures are not necessarily a bad thing. When a bank fails, we've got a deeply troubled institution that cannot lend money. If we go in and resolve the failure, the cleanup of that situation ... will enable the institution to get on with lending. The (dollar) numbers are bigger today because everything's bigger today. I don't think the failures are any larger today proportionate to the economy. The FDIC cleans out the problem loans. So it really does cleanse the system and help us get lending started again, which is what we need." - William Isaac, former FDIC Chair during the S&L crisis of the 80s

Economic reports from the past week (with occasional translations…)

Manufacturing in the New York region grew in August for the first time in more than a year and factory activity in the US Mid-Atlantic region turned positive in the same period. The Federal Reserve Bank of New York’s general economic index had its first expansion since April 2008, while the Philadelphia Fed factory reading rose for the first time on 10 months.

These reports indicate that companies are restarting assembly lines after slashing inventories at a record rate. Economists project growth will resume this quarter, helped by stabilization in manufacturing and housing. – US Federal Reserve Bank

“Seventy-three percent of Baby Boomers who own a Traditional IRA are not planning to convert it to a Roth IRA in 2010, when the previous household income limit of $100,000 will be eliminated. Any investor who converts in 2010 will have two years to pay the taxes. Among households with an income of $100,000 or more, 57% don’t even know that the income limits on Roth IRA conversions will be eliminated. The combination of lower account values, historically low income tax rates, conversion income limits lifting and the ability to pay the tax bill over two years provide a rare opportunity to potentially increase your income in retirement by hundreds, and even thousands, of dollars each month by eliminating taxes through a Roth IRA.” - USAA Wealth Management

Sales of existing homes in July jumped at the fastest rate in 10 years. Sales of single-family homes increased 7.2% in July from a month earlier million units. The monthly increase was the largest since 1999, when the NAR began collecting data for all types of homes -- its measure includes condominiums and cooperative apartments. It marked the fourth monthly rise in a row. Sales also were up 5% from July 2008, showing the first gain from the year-earlier level since November 2005.- National Association of Realtors

Falling commodity prices took a huge bite out of producer prices in July, pushing them down 0.9%. However, we already know that commodity prices are higher in August, which means overall producer prices will bounce back next month, renewing what we expect to be a generally upward trend. Although “core” producer prices fell 0.1% in July, this follows an unusually large 0.5% gain in June. Higher inflation is evident in core producer prices deeper into the production chain. Core intermediate prices increased 0.2% in July, the second straight gain; core crude prices rose 2.9%, the third straight gain.

These higher core prices show that monetary velocity is rebounding and loose monetary policy is having an impact on the economy. Despite this, the Federal Reserve is likely to remain incredibly loose at least through the end of the year, which means the underlying trend of higher inflation will continue. – First Trust

“The recent conversion of Citigroup's shares into common has netted the Treasury a $10 billion (unrealized) profit. Treasury converted $25 billion of their $52 billion in preferreds at $3.25 and with the closing yesterday at $4.48 the stock has appreciated over 40 percent.

Each penny increase in the stock price produces a $76 million unrealized gain. (Who says pennies don’t mean anything???)

As we understand it, the Treasury isn't restricted as to when it can sell its common stake and while it may be a bit early and we think the sale of their common stake isn't imminent (though it would be nice to make a big profit while saving the system & getting out), we also don't think of them as a long-term holder." – UBS report (For everyone who thought the government wasted money helping banks out…it’s similar to how the Feds made out when they bailed out the S&Ls)

Professional money managers are buying into the rally in a big way:

75% believe the world economy will improve in the next 12 months. That's the highest level in nearly six years and up from 63% in July.
Average cash balances have fallen to 3.5%, the lowest since July 2007.
34% of managers surveyed are now overweight stocks, the highest since October, 2007.
Risk appetite is also increasing, to the highest levels in two years. - Merrill Lynch Survey of Separate Account Fund Managers

Perspective
“Still improving by the day”

I used this quote from Jim Cramer last week and it still seems applicable.
While I’m surprised that we haven’t had some sort of correction yet – correction being defined as a drop of 5% to 10% - I’m not upset, as many seem to be, that the market has had the seeming audacity to go up when so many have decided the move is not warranted/justified/whatever. I’m wondering if Mr. Landesman isn’t on to something in his musings.

What’s really interesting to me is that so many people – both within the investment industry and without – are still working so very hard to talk themselves out of this market move. It’s pervasive in the words I hear in ads with references to a tough economy, the “yeah, but…” kinds of responses I get to my views and the news always adding hedge clauses about what negatively “might, could, may” happen, in spite of the positive economic reports. Why can’t the “might, may or could – or even will” – turn out great?

I just flat don’t get why there can’t be a positive forward view instead of being hung up on what’s already happened that was, for sure, not so good. A guy who I think really has the current mindset figured out is Brian Wesbury. He’s an economist with First Trust. Here’s what he says…

“Those who were pessimistic about stocks and the economy early this year are going through the classic five stages of grief. First, they denied a recovery was going to happen anytime soon. Then, they lashed out with anger at those who spotted signs of the recovery. Now, they are bargaining and reluctantly admitting the existence of the recovery that they did not see coming, but belittling it. Next, as things keep moving up, we can expect them to get depressed…we don't expect acceptance to fully set in until late next year.”

American companies and individuals are now sitting on record mountains of cash. Why? I haven’t the foggiest. Must be worry or fear about the markets and economy. If that’s the case, here are my questions.

What are you worried about? Why are you afraid? What is out there in the economy that is causing this frozen at the switch type response? I have yet to receive a definitive answer to those questions. It’s all emotional, to be sure, because it’s sure not justified by the facts. Unfortunately, emotions always trump logic.

Confusion could likely be part of it. Given what the current crop of “wizards” in DC are doing, one can’t fault that response. (For example, in talking with a couple car dealers this past week – who have yet to see any money from the CFC deal- the response was if they (DC) can screw up something as relatively easy as this, how bad would a government run health care system be. But, I digress.)

This tendency, as one astute gentleman of my acquaintance put it this week, of being “fashionably frugal,” is not how to move forward. It takes fortitude, it takes conviction and it takes a view of and toward the future that is positive. And yes, you do have to put your money to work – whether it’s in your business or in a high quality investment plan – or both. Take to heart what Mr. Buffett said about cash equivalents (savings accounts, money markets, Treasurys) in the Tea Leaves section.

The current conventional wisdom – a term which, in my experience, may be current but usually isn’t wisdom – has it that “look here, stocks in this decade have effectively produced no return.” Due to 2008, there’s a modicum of truth there. Those people are saying, “be safe – put all your money in bonds.” As used to be said in my old neighborhood on the South Side of Chicago when a less than insightful thought was offered - “what, are you nuts?”

Interest rates and inflation are likely to be moving higher over the next couple years. That isn’t necessarily a bad thing as long as it can be somewhat controlled. The point is they aren’t going lower. If you put all or most of your money in bonds, CDs and the like, you WILL have a major erosion in your buying power and have NO protection against inflation – a major challenge for those in or near retirement. Safe, you would find to your dismay, is a relative thing.

You don’t invest using what worked last year – that’s an invitation to consistent underperformance. Check the record yourself. NO ONE knows how any of the markets will do year to year or what segment will be best. That’s the case for asset allocation.

The reason the returns have been historically higher for stocks in the US than ANY other investment over our entire history is simple. There is risk in putting that money to work in a business or in equities – the return, though likely - is NOT guaranteed. And some of your investment money should be in for sure type stuff – but NONE of it that is meant to be used more than 3 years from now.

To me, the only thing that we have in common with the 1930s is what FDR said early on and that is fear itself. Try to look at the markets and economy objectively and see that there is little to no basis for the fears the media and self-serving politicians and market types are putting out there.

Now, as JFK would have said, it’s time to move forward with vigor. And, finally, as Mr. Kresh so eloquently put it, “getting in the middle of a long-term rally is a hell of a lot better than not getting in at all."

Nothing to worry about – the future’s so bright, you have to wear shades…

All my best,

Mike
509-747-3323

Closing values as of 21 August 2009
Dow Jones 9505 S&P500 1026 NASDAQ 2020 Oil $73.48/bbl Gold $955.70/oz

Market retrospective - week of 14 August

m.maehl@opus111group.com (Mike Maehl) — Thu, 20 Aug 2009 13:49:00 +0000

Contents: Overview; Tea leaf readings; Economic reports; Perspective, “The Wall of Worry”

“Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window.” - Peter F. Drucker, Austrian-born American business consultant, (1909-2005)

Overview

Even though the major indexes closed just slightly lower this past week from the week before, stopping the market’s run at four up weeks in a row, “let the record reflect” that all three of the major indexes are still up year-to-date: The Dow's up 6.2 %, the NASDAQ, 26%, and the S&P, 11%. While we still haven’t recaptured what we lost late in the third quarter and into the fourth quarter last year, we are definitely trending the right way.

Have you noticed how the media seems to always overplay the negative in the markets, economy and investing? For example, a headline at the close on Friday said, “Stocks Snap Four Week Winning Streak.” Reading that, I’d be inclined to think things were really ugly. I mean, to snap something is painful. In reality, the Dow was only down 0.006% - 60 points – from Friday to Friday. Maybe it’s just me but my headline would have been more like, “Stocks just miss extending rally for fifth week.” That, in my opinion, would have been more forthright.

The point is that when you’re reading market comments, hearing opinions, evaluating information – do yourself a huge favor. Do like Paul Harvey used to do – get the rest of the story. What is the reason the person is writing or saying something about the topic?

Contrary again to what the web pages, ads and talking heads would have you believe, there is no one size fits all when it comes to investing. Your needs, situation, timing, abilities and feelings are the key to building a successful investment result. Finding someone you can trust to take all those personal considerations and who will communicate with you in a manner with which you are comfortable will do much to defend you from the – as Mr. T would have it – the “jibber-jabber” and get you to where you want to be.

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 can expect a lot of volatility in stocks. When you have these rapid increases, almost without correction, you will definitely have a correction at some point.” - Mark Mobius, executive chairman, Templeton Asset Management Ltd.

“There’s always a real risk that a rally is going to be tested. Investors are thinking that giving up some upside to hedge the downside is a very reasonable investment profile.” - Stephen Wood, chief market strategist for North America, Russell Investments

“The combination of a highly accommodative Federal Reserve monetary policy, the end of the panic and the relaxing of the mark-to-market accounting is boosting economic activity. Over the next 12 to 18 months, we expect higher stock prices, more inflation, higher bond yields and a relatively stable dollar. The economy is improving – stimulus or not.” – Brian Wesbury, chief economist, First Trust (I definitely agree with his overall view and conclusion.)

“The news on the economy is that it’s recovering, the news on corporate profits is that they’re recovering. That’s what’s bolstered the stock market.” - Nick Sargen, chief investment officer, Fort Washington Investment Advisors

“Cost of Government Day for 2009 was August 12. On average, working people must toil 224 days out of the year just to meet all costs imposed by government. In other words, the cost of government consumes 61.34% of national income.

Cost of Government falls 26 days – almost a full month – later in 2009 than last year’s revised date of July 16. In 2009, the average American will have to work an additional 43 days out of the year to pay off his or her share of the cost of government compared to 2000, when COGD was June 29.” – Americans for Tax Reform

"Stock investors are making overly optimistic assumptions. The key stimulus has already come into the consumer and has helped in the last few months. But for the third and fourth quarters looking ahead, I am not so sure things will be as good." - Mohamed El-Erian, co-CEO and co-CIO, PIMCO (A smart guy to be sure. He’s also in charge of one of the largest bond portfolios in the world – and bonds usually don’t do so well when stocks go up…)

Economic reports from the past week (with occasional translations…)

Productivity, a measure of how much an employee produces for each hour worked, rose at an annual 6.4% pace, more than forecast, after a 0.3% gain the prior three months. Labor costs fell by 5.8%, the most in eight years, more than double the first quarter's 2.7% decline. – US Department of Commerce

The US trade deficit widened less than forecast in June, reflecting a second consecutive gain in exports spurred by a pick-up in economies throughout the world. The gap increased 4 % to $27 billion from $26 billion in May. Exports gained 2%, helped by stronger demand for goods such as semiconductors and aircraft engines, while imports rose 2.3%, led by a higher cost for oil. Increases in both exports and imports signals that the global slump is coming to an end. Investor sentiment improved around the globe this month, turning bears into bulls in five of the world’s biggest stock markets as earnings and economic data topped estimates. – US Department of Commerce

Officials on Wednesday left interest rates near zero but suggested the economy is on more stable ground. The Fed plans to continue purchases of up to $300 billion of Treasury securities through October. The one upgrade came on the economy: "economic activity is leveling out" is definitely a bit more positive than their "the pace of economic contraction is slowing," statement of June 24th. – Federal Reserve (This is Fed-speak for they think the recession is over…)

The average taxable money market fund yielded 0.08% for the week ended August 4, according to iMoneyNet.com. (Tax-free rates would be lower.) At that rate, a $10,000 investment would return 15 cents a week or $7.80 a year, according to USA TODAY. Nearly one-quarter of these money funds have no yield. The average money market fund charges about 40 basis points per year for expenses. It is estimated that 80% of all funds are waiving some or all of their expenses to keep share prices from falling below $1. - Peter Crane, editor, Money Fund Intelligence (Money markets accounts are NOT investments – they’re just parking places for money. There is still over $2 trillion parked in these type things – fuel for the markets…)

Initial claims for jobless benefits rose by 4,000 to 558,000 on a seasonally adjusted basis in the week ending August 8. The tally of continuing claims -- those drawn by workers for more than one week -- fell by 141,000 during the week ended August 1 to 6,202,000 -- the lowest level since April 11. – US Department of Labor

US business inventories fell by a slightly more-than-expected 1.1% in June. Companies continued to reduce merchandise amid weak demand. The need to rebuild inventories in almost all industries will keep the economic recovery going. It was also reported that business sales at all levels rose 0.9% in June after being flat in May. This marked the first increase in total sales since July 2008. – US Department of Commerce

Perspective
“The wall of worry”

An old stock market adage has it that a bull market climbs a wall of worry. My way of interpreting that is that the markets go up even when current events – or some yet to come – cause many to worry that the results of these events will make the markets drop. Given the extremely positive market results of the past 5 months, it would seem to be true as many today continue to worry about some aspect of the economy.

Markets are cyclical and values fluctuate – daily, quarterly and annually. Mr. Drucker’s opening quote is especially true about the markets. Day to day results are simply a function of how the investing public feels that day. However, real investing, as opposed to trading, is all about longer term results – say, in excess of three years. For that reason, I can’t be worried about the outcomes. Whether I consider just my time in the industry or I study the history of markets, the results have always been positive.

Let’s consider that historical record…keeping it, for these purposes, relatively recent and look at the data back to 1970. And these results include 2008.

The annual return for US bonds has been 9.30%. For international bonds, with a bit more risk, has been 9.70%.

US stocks have returned annual results of 9.5% with international stocks up 9.70%. Pretty good, right? The key is that you would have had to stay the course and not bail when the media scaredy cats were running about.

Inflation over these almost 40 years has averaged 4.5% per year. The 70s and most of the 80s were pretty tough in that category. So, netting out the inflation, returns on both stocks and bonds in and out of the US was about 5%. At that rate, you were doubling your money every 14 years.

Since I hitched a ride with Mr. Drucker, I can’t tell you if this will be the case going forward…but I sure am inclined to think it will be pretty close. Near-term will likely be tough for bonds with interest and inflation rates rising but it reinforces the case for asset allocation and not being all in one investment class.

Let’s now consider what some folks who are supposed to know what they’re talking about have to say. The Blue Chip Economic Indicators national survey of private economists released this past week showed about 90% of the respondents believed the economic downturn would be declared to have ended this quarter. "Debate now centers on the speed, strength and durability of the recovery," the survey said. That will always be the subject of debate –especially if, occasionally, you substitute the word “correction” for recovery…

There’s a lot of talk right now about big government saving America. I don’t think big government saves us from anything. At the end of the day, it’s all about economic freedom, market competition and free enterprise that remain the great engines of American growth.

Government “programs” are similar to the result you get when you put sugar in the gas tank – for sure, don’t try that at home.The greatest source of stimulus for both this new bull market and the economic recovery is profits. Profits – not taxes - are what drive stocks, business and eventually - the economy. The current party in power never seems to grasp that. To be fair, the Federal Reserve played a big role in cushioning the banking system. Ultimately, the self-correcting actions of American businesses are what always drive this economy.

I’m an optimist because we remain a market-driven economy. Based on what I’m seeing, it would sure seem that most people in the country still fell that way and want it to remain so.

As the always subdued Jim Cramer has put it, “don't let the press confuse you. We are almost at Dow 9,400 because things are better than you think - and still improving by the day.”

Nothing to worry about – the future’s so bright, you have to wear shades…

All my best,

Mike

509-747-3323

Closing values as of 14 August 2009
Dow Jones 9321 S&P500 1004 NASDAQ 2009 Oil $67.47/bbl Gold $949.20/oz

Market retrospective - week of 7 August

m.maehl@opus111group.com (Mike Maehl) — Wed, 19 Aug 2009 21:40:00 +0000

Contents: Overview; Tea leaf readings; Economic reports; Perspective, “This recession is OVER!”

“I have never known a concern to make a decided success that did not do good, honest work, and even in these days of fiercest competition, when everything would seem to be a matter of price, there lies still at the root of great business success the very much more important factor of quality. The effect of attention to quality, upon every man in the service, from the president of the concern down to the humblest labourer, cannot be overestimated.” - Andrew Carnegie, Scottish-American Industrialist, Philanthropist (1835-1919)

Overview

In my Perspective last week, I said that the market move was a long way from being done. Even after this week’s rather magnificent performance, I am still very much of that opinion.
As of Friday’s close – and after coming out of the cavern that existed up until 6 March – the Dow Jones is now up 6.8% for the year, the S&P 500 is up 11.9% and the NASDAQ – home of tech and newer growth companies – is up 26.8%. And yet, many (most?) people are still casting a wary eye on all this and waiting for “something bad” to happen. That’s evidenced by the fact that deposits in money market and other savings type accounts is still more than the value of the ENTIRE S&P 500. I’m sorry but that’s crazy – it can’t stay that way. Other than bad government policy gumming up the works, I really don’t know what that bad thing would be. Right now, the markets are saying the health care “reform” and cap and trade are dead deals. Once those are officially put to sleep or hugely modified, things will really light up.

I’m very much in the V shaped recovery camp. That is, we went down hard and fast and we’re going to recover a lot faster than the current conventional wisdom has it. We’re well past the green shoots phase and into the growth phase. I can bore you with lots of facts and data but the best proof is in the market itself.

Markets have always been anticipators – about 6 months ahead is what they suggest. Right now, the vote is a big thumbs up for stocks and a big thumbs down for bonds.

By the way, in the 36+ years I’ve been advising clients, each time we’ve had a recession, the subsequent recovery has always taken the stock market past the previous highs. After all the recovering we’ve done so far this year, we still remain about 30% below those previous highs.

The market train hasn’t left the station but you need to have a seat if you want to ride it
higher…

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.)

"Our propriety cyclical index says RECESSION IS OVER (his caps). All the encouraging global readings on manufacturing, including this morning's report from China, are consistent with the onset of recovery and some point to a strong recovery. We call July the first recovery month. The transition from job losses to gains could come as soon as August. Remember historically, once you have seen one month’s job increase, you are already in recovery." - Robert Brusca, Chief economist, FAO Economics

"What you really have is money that's been on the sidelines starting to gently come in and more of a willingness to take on some risk." - Pete McCorry, stock trader, Keefe Bruyette

A middle-income family with a child born last year will spend about $221,000 raising that child through age 17. Housing is the largest single expense, followed by food and child care/education costs. The $221,000 in expenses rises to about $292,000 when adjusted for inflation - USDA Center for Nutrition Policy and Promotion report

Barclays Capital raised its forecast of current quarter growth to a 2.5% real annual rate, with a 3.0% growth pace during the fourth quarter. Economists at JPMorgan Chase revised their third quarter growth forecast from 2.5% to 3.0%. - The Wall Street Journal (This is majorly better compared with a negative 6.4% in Q1 and a negative 1% in the just passed quarter.)

“I think we’re factoring in some pretty major inflation. There’s been a report that there has been $21 trillion of new debt that was recently put out. The Treasury has been printing money 24-7 and that’s got to have its toll. We will see markets go down some and we’ll have volatility but, all in all, we’re in a market that will go up much higher over the next 3 to 5 years.” - David Dreman, chairman and CIO, Dreman Value Management

"The economy is at the turning point from the recession as the labor market is starting to heal. If the job losses have halted, and this is a good first step in that direction, consumer spending could lift faster than the market is expecting. At the very least, today's (unemployment) report is additional evidence that the recession ended in the second quarter and the odds of a 3% real GDP recovery in the second half of 2009 are growing. Today is welcome news as it is likely to chase the doomsayers out of the market." - Chris Rupkey, economist, Bank of Tokyo-Mitsubishi

Treasuries lost 5% in market value this year and are on a pace to post an annual loss for only the third time since 1978. The index rose 14% last year. - Merrill Lynch & Co. and its US Treasury Master Index (The moral here is to NOT use what worked last year as the place to invest this year…)

Economic reports from the past week (with occasional translations…)

Pending home sales rose for the fifth consecutive month in June, easily topping expectations. The last time there were five consecutive monthly gains was July 2003. Pending home sales were higher in all four regions than last month and only the west experienced a decrease from a year ago. - National Association of Realtors

“Consumer spending was up in June and is up at a 2.5% annual rate so far in 2009, a marked contrast to the 6.6% rate of decline in the second half of 2008. However, for the time being, a revival in inflation is offsetting the gain in cash spending. Temporarily, we see the upswing in inflation as good news, in the sense that monetary velocity is returning and the recession is over.

Moreover, yesterday’s data on auto sales show that real consumer spending will be substantially higher in July. With cars and light trucks (pick-ups and SUVs) being scrapped at a 13+ million annual rate, we expect auto sales to grow strongly over the next couple of years, with or without government incentive programs.” – First Trust

New orders received by US factories unexpectedly rose in June, advancing for a third straight month. Factory orders climbed 0.4% in June after increasing by a revised 1.1% in May, previously reported as a 1.2% rise. – US Commerce Department

The US Treasury said Wednesday it would sell $75 billion in debt next week in a record quarterly refunding and announced plans to gradually increase issuance of inflation-indexed notes as its borrowing to fight a recession grows. The bonds are commonly known as TIPS, which is short for Treasury Inflation-Protected Securities. First sold more than a decade ago, TIPS pay out a fixed amount above the change in the consumer price index (CPI). That makes them popular for investors who believe that economic growth or heavy federal spending will put upward pressure on prices. China, the largest holder of U.S. government debt, is among investors that have indicated they want to buy more of the securities. – Wall Street Journal

The number of US workers filing new claims for state jobless benefits fell last week. The four-week average of new claims, which aims to smooth volatility in the data, fell to the lowest level since January 24.

The pace of US job losses slowed more than forecast in July and the unemployment rate dropped to 9.4% from 9.5% for the first time since April, 2008. In addition, workers' hours and pay edged upward. – US Labor Department

Large US industrial manufacturers are far more optimistic about domestic and global economies than they were three months ago. 43% of respondents are optimistic about the U.S. economy over the next 12 months, up by a significant 27% from the first quarter. – PricewaterhouseCoopers consultancy quarterly survey

The government's results showed small cars as the top choice for shoppers looking for Cash for Clunker deals. But an independent analysis by Edmunds.com disputed those results and showed that two full-size trucks and a small crossover SUV were actually among the top-ten buys.
The discrepancy is a result of the methods used. Edmunds.com uses traditional sales measurements, tallying sales by make and model. The government uses a more arcane measurement method.

For example, the Ford Escape crossover SUV, instead of being the seventh-most popular vehicle under the program, as the government ranked it, was actually the best seller, according to Edmunds.com. (I’m “sure” the administration isn’t trying to stack the deck…)

The (real) Top 10 / Ford Escape SUV; Ford Focus; Jeep Patriot; Dodge Caliber; Ford F-150; Honda Civic; Chevy Silverado; Chevy Cobalt; Toyota Corolla; Ford Fusion – CNNMoney.com

Perspective
“This recession is OVER!”

Two items for disclosure, as they color this – and most other – of my perspectives.
First, politically, I’m a card-carrying, dyed-in-the wool Independent. Have been since we lived in Alaska and registered as one. Then, when it comes to the markets – and “conventional wisdom” – I’m a contrarian. According to the good folks at Wikipedia, that means I’m a guy who “seeks opportunities to buy or sell specific investments when the majority of investors appear to be doing the opposite, to the point where that investment has become mispriced.” You can substitute “market” and/or “economy” for investment and still be accurate.

As you can see from a few of the Tea Leaf quotes and some of the Economic reports, I’m not exactly the Lone Ranger here…there are some already noticeably positive things going on.

However, I’m a long way from the majority opinion either. Let me try and explain how I got to this.

There are still many “experts” – at least they were when brimstone was upon us – who can’t stop coming up with reasons why this is a head fake, a trap, etc. Many of them have a vested interest in doing so. One, because their workshops (and fees) are all based on an EOWAWKI (End Of The World As We Know It) premise of some sort. The other is because they are money managers who have stayed too long on the sidelines and are doing what they can to help drive prices lower so they can get in. Bottom line – they have a self-serving position that can’t become positive. They’ve been playing the bad guy too long…

Improving earnings are what make stock prices go up. We’ve got those in spades, right now. Of the 427 companies in the S&P 500 that have already reported their earnings, 73% have done better than expected, 8% were on target and just 19% missed – and many of them by a small amount. The trend is our friend…

The global markets – our vendors and our customers – are doing better. Shanghai, Germany, France, Hong Kong, Australia and the UK are all at yearly highs!

Here’s a biggie. Inventories for business have been driven to low levels not seen since the 80s. This means that with “stuff” in the stores and their nearby warehouses so low, manufacturing output has to pick up a lot and quickly to meet any new demand. A good example is cars. Even before the Cash for Clunkers deal, Ford, Chrysler and Government Motors have all had to increase production to meet the pent-up demand.

And finally, let’s add in interest and inflation rates at historic lows – and likely staying there for a while. Housing has stabilized and must pick up to meet the demand – we’re still making and importing more people and they need places to live.

Banks will reap major benefits from a resurgent real estate business. Techs will continue to lead with new developments and improvements on existing systems. Oil will probably continue to appreciate as the global economies pick up. Research and development will lead us to companies and products we don’t even know about yet.

It all seems pretty crystal clear to me. The only way we’re going is up. Please make sure that you’re included in this move…

All my best,

Mike

509-747-3323

Closing values as of 7 August 2009
Dow Jones 9370 S&P500 1010 NASDAQ 2000 Oil $70.78/bbl Gold $955.80/oz

Market retrospective - week of 31 July

m.maehl@opus111group.com (Mike Maehl) — Mon, 03 Aug 2009 16:59:00 +0000

Contents: Overview; Tea leaf readings; Economic reports; Perspective, “A few words about housing”

"If you don't sell, you're never wrong, but there's no perfection in the market, only change. The only perfection is in the graveyard where nothing stirs.” – Martin T. Sosnoff, chairman and founder of Atalanta/Sosnoff Capital, a private investment management company with more than $8 billion in assets under management

Overview

This July has been a real winner!

The Dow Jones had its best July performance since 1989 and the S&P500 put up its best result since 1997. Just for the month alone, the Dow was up 8.6%, the S&P was up 7.4% and the NASDAQ up 7.8%. There are many years when we don’t get that kind of result…

Since the March 6th low, the Dow is up 40% and the S&P is up 46%. The NASDAQ has outperformed both – up 57% during this time. This means that the NASDAQ is now only down 12% since last September. That’s much better than the Dow and S&P, which are both still 20% below where they were before Lehman Brothers filed bankruptcy.

The market's gains have been driven primarily by corporate earnings news. For the quarter so far, 75% of the S&P 500 companies have topped Wall Street expectations. Since earnings drive stock values, that’s really good news.

So, can August do as well? It says here that since 1896, the Dow has been up 61% of the time, with an average gain of 4.5%. And when July is a positive month for stocks, most of the time August is also higher. For the Dow, August was higher 64% of the time following a positive July, but the gains were more tempered, averaging just 1.6%. In other words, it looks good but probably not as exciting.

It’s typical that in the early stages of a new bull market, after the initial powerful rally off the lows, investor moods shift from the depression levels of those lows. Then, a set of worries set in as people wonder if the market has come too far too fast. This is where we are now.

As I’ve mentioned many times in these writings, it’s been my experience that each market drop has seen a subsequent recovery that ultimately exceeds the prior highs. For those thinking that we’re close to the top, consider this. When looking back at the most recent highs set in October, 2007, the Dow is still off 35%, the S&P is down 37%, while the NASDAQ remains 30% lower.

There’s definitely more to go. In the spirit of the season, come on in (to the market) – the water’s fine!

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's a good time to buy stocks. Traders are a little trigger-happy to trade on the slightest bit of bad news these days. As for all the talk about earnings only being good because of cost-cutting efforts and sales still being weak, people are reading too much into it. We are at the bottom of the recession and sales are exactly where they should be. Why would anyone expect there to be good sales growth at the bottom of a recession?” - Jim Paulsen, chief investment strategist, Wells Capital Management

"We always say that markets climb a wall of worry and with that said, on every front there's something to be worried about. The tug-of-war has existed from the very beginning that the recovery was going to be muted against those who say you're going to be surprised that this is going to be a stronger recovery." - Quincy Krosby, general market strategist, Prudential Financial

"The only thing that you're hearing the bears scream about is that without jobs there can't be a real recovery. For the last several decades, the jobs have been more and more of a lagging indicator." - Jordan Kimmel, market strategist, National Securities

"I'd hesitate to be part of that big crowd that is always going to be worried about a pullback or think we definitely have to correct here. I don't think it's time to lighten up. Ride the trend as far as it goes." - Richard Sparks, senior analyst, Schaeffer's Investment Research

The S&P 500 was down 2.2% per year (total return) for the 10-years ending 6/30/09. Ten years ago, the S&P 500 was up +18.8% per year (total return) for the 10-years ending 6/30/99 - BTN Research (Average return = 8.3%; the case for long-term equity investing)

Support for President Barack Obama’s health-care effort declined over the past five weeks, particularly among those who already have insurance, as Congress struggled to finalize legislation and attention focused on the high price of the proposals.

In mid-June, the public was evenly divided when asked if they thought Mr. Obama’s health plan was a good or bad idea. In the new poll, conducted July 24-27, 42% called it a bad idea while 36% said it was a good idea. Among those with insurance, the portion calling the plan a bad idea rose to 47% from 37%. - Wall Street Journal/NBC News poll

45% of retirees aged 55-75 surveyed in April 2009 have either not calculated how long their assets are anticipated to last during their retirement years or they have never given the issue any thought. - Society of Actuaries

"We're seeing companies use temporary workers to fill short-term gaps where they've cut too deeply. That's typically a leading indicator things are bottoming out and companies are positioning themselves for a recovery." - Bill DeMario, COO, Ajilon Professional Staffing, a unit of Adecco

Economic reports from the past week (with occasional translations…)

Gross domestic product (GDP) measures total goods and services output within US borders. GDP fell at a 1% annual rate in the second quarter. First-quarter GDP was revised to a 6.4% drop from an earlier reading of a 5.5% decline. Economists surveyed by Dow Jones Newswires projected a 1.5% decrease. But the slump was still smaller than the contraction over the previous nine months, in a powerful signal that the recession has eased. - US Commerce Department

There is better news around the world. It has been reported many times that China's economy is growing at an 8% rate. The German IFO index, a measure of business sentiment, rose for the fourth month in a row. The European Composite Purchasing Managers Index has been up five months in a row. South Korea's GDP grew 2.5% annually last quarter, which is the fastest growth rate in five years. – Forbes

Most of the 12 Fed district banks indicated that the pace of decline has moderated since the last report or that activity has begun to stabilize, albeit at a low level. The pace of the recession has slowed or stabilized in most areas of the US. - Federal Reserve beige book (named for the color of its cover)

On a seasonally adjusted basis in the week ended July 25, the four-week average of new claims, which aims to smooth volatility in the data, fell by 8,250 to 559,000, the lowest level since January 24. The tally of continuing claims -- those drawn by workers for more than one week -- fell by 54,000 during the week ended July 18 to 6,197,000 - the lowest level since April 11. - US Department of Labor (the trend is definitely our friend here…)

Orders for US durable goods, excluding automobiles and aircraft, unexpectedly gained in June, signaling that manufacturing may expand in the second half of the year. Excluding transportation equipment, orders for goods meant to last several years climbed 1.1 % - the most in four months. – US Department of Commerce

"Crude stock data looks bearish from any angle ... the increase looks like the beginning of a trend reversal in crude supply that could eventually erase more than half of the draw of the past two and a half months." - Jim Ritterbusch, president, US energy advisor, Ritterbusch and Associates (A recent Reuters poll of analysts forecast oil prices will average $73 a barrel next year, up from an average 2009 price prediction of $58.23 a barrel. According to the DOE, the production of crude oil that occurs in the USA today (5.0 million barrels a day) is the same level of domestic production as it was in 1949.)

“The administration has fulfilled a promise to cut spending by trimming $100 million from the 2009 budget. That's right — $100 million with an "m," an imponderably small slice of this year's expenditures. In fiscal 2009, our federal government will spend nearly $4 trillion, according to the Office of Management and Budget's historical tables. The $100 million cut represents 0.0025% — less than one one-hundredth of 1% — of those outlays.” – Investor’s Business Daily

Perspective

“A few words about housing”

I am not a real estate expert. I do stay on top of those markets however, as part of my advisory practice, since it’s always been important to me to be informed so I can help my clients know how to position that portion of their assets. In that regard, I thought I’d offer a few observations.
So, let’s see where we are now.

The Commerce Department reported last week that new home sales increased 11% in June for the largest one-month increase in almost nine years. The last time sales rose so much was in December 2000. Sales have risen now for three straight months. That’s good. Matter of fact, sales blew came in higher than any of the 63 economists who made a forecast. If we compare the current numbers with January, new and existing home sales are up 17% and 9%, respectively. A good trend here.

When you do the big picture view, even with this increase, new home sales are still well below their long-term trend of about 950,000 per year. Says to me that sales will have to continue to move up a bunch over the next few years.

According to the S&P/Case-Shiller home-price index, home prices in 20 metropolitan areas climbed in May from the previous month for the first time in three years, another sign the market is stabilizing.

Another engine to help drive home construction is that in January, the supply of new homes was 12.4 months; now it’s down to 8.8. The number of new home homes for sale is less than half it was at the inventory peak in 2006 and the number of unsold new homes under construction has not been lower in about 40 years.

Falling home inventories and rising home sales are an important part of the broad economic recovery that’s taking place all around us.

Remember – Don’t fight the trend. The future is so bright, you have to wear shades!

All my best,

Mike
509-747-3323

Closing values as of 31 July 2009: Dow Jones 9171 NASDAQ 1976 S&P500 987
Oil $69.50/bbl Gold $954.50/oz

Market retrospective - week of 24 July

m.maehl@opus111group.com (Mike Maehl) — Mon, 27 Jul 2009 14:01:00 +0000

Contents: Overview; Tea leaf readings; Economic reports; Perspective, “This market move is a LONG way from being done!”

"Our dilemma is that we hate change and love it at the same time. What we really want is for things to stay the same but to get better.” – Sydney J. Harris, US journalist, (1917 – 1986)

Overview

The investment world is full of aphorisms and sayings. One that seems to fit in today’s environment is that “the trend is your friend.” The point of this is that, whatever your emotions may be telling you, the trend of the market is the trend/direction (up or down) and whether you feel it’s right or not, you go against it at your peril.

This week started strongly with good earnings and generally positive economic news and the momentum from last week just kept building. While Friday was pretty lame, we still managed to close with all three major stock indexes higher on a week-over-week basis. The Dow has now gained 12% in just the past two weeks – something it hasn’t done since 2000. It’s also up over 9000 for the first time since January. Interestingly, it’s just about as far above the low hit this past March (+38%) as it is below its all-time high (-36%) set in October, 2007.

For the year, the NASDAQ – which is composed of 100 growth and tech companies - is definitely the leader, up 25%. The S&P 500 is now up just over 8% and the Dow is the laggard, up just under 4% year-to-date.

Earnings are what’s driving this bus and, quite frankly, is what is always the main market engine.

So far, according to Bloomberg, of the 167 S&P 500 companies that have reported, 74% are ahead of analyst estimates. More important, most of these are suggesting that the rest of the year is looking pretty okay. The market rises or falls on perceptions of the future and right now, those perceptions are getting brighter and clearer. The trend is, indeed, our friend…

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.)

“Most people missed the lows and continue to treat this as a rally in a bear market. Hey folks, every bull market that I’ve seen began being called a short-term rally in a bear market.” -
Jeffrey Saut, chief investment strategist, Raymond James & Associates

“With every passing month, another 870,000 people turn 65 and the world’s cohort of pensioners become larger still. Thanks to rising life expectancy, their ranks will soon be growing by almost two million a month and, by 2040, their numbers will have doubled to 1.3 billion. People over 80 are multiplying faster than any other age group, with their ranks are set to grow by 233%.” – Daily Telegraph, London

“Investors will find a lot of bargains among US stocks in the next year as the economy recovers and consumer spending improves. The world is simple. You just want to find the best ideas, risk adjusted.” - Mario Gabelli, chairman and chief executive officer, Gamco Investors Inc.

"What I like about the rally that we've seen so far is the breadth of it. It's not really confined to a single sector. It's broadly spread. It's certainly helping to restore investor confidence, given the trauma that people went through.''- John Coyne, president, Brinker Capital

"The recovery is going to be subpar. I see a one percent growth in the economy in the next few years. There will also be 11% unemployment next year and the recovery is going to be slow. It's going to feel like a recession even when it ends." - Nouriel Roubini, the economist whose dire forecasts earned him the nickname "Doctor Doom” (As we used to say in the Marine Corps, there’s always somebody that doesn’t get the word, i.e., doesn’t get informed. I think he is one who is doomed…)

"Overall, the news is positive. We have increasing existing home sales for the third straight month, declining inventory and although prices fell, they declined at a less steep pace. The housing market is healing after four years of recession." - Lawrence Yun, chief economist, National Association of Realtors

“Citigroup looked at the period of the housing boom, between 2003 and 2007, and noticed that consumers still had reserves. The idea that we spent everything we had… is so flawed, and so false, but it's the most mythical argument put forward day in, day out. The stock market is likely to go higher because there are still many institutional investors who missed the current rally. It's not so much shorts, it's guys who are underinvested in the markets. This is big money that needs to catch up on performance.” - Tobias Levkovich, chief US equity strategist, Citigroup

Global investors give Federal Reserve Chairman Ben S. Bernanke top marks for combating the worst financial crisis since the Great Depression and overwhelmingly favor his reappointment amid optimism that the world economy is on the mend. - Bloomberg

Economic reports from the past week (with occasional translations…)

The index of leading economic indicators (LEI), which is supposed to forecast economic trends six to nine months ahead, rose more than expected by 0.7% in June. This was the third straight month of increases. Over the first half of the year, the index has increased at a 4.1% annual rate. – The Conference Board

In 1986, the highest marginal tax bracket for individual taxpayers was 50%. The top 1% of taxpayers paid 26% of all federal income tax in that year. The highest marginal tax bracket for individual taxpayers was 35% in 2006 and remains there today. The top 1% of taxpayers paid 40% of all federal income tax in 2006 - Internal Revenue Service

While US economic growth is expected to be around 1% to 2% next year, global GDP is expected to rise 3.7% in 2010, with emerging markets forecast to gain 5.5%. China's Shanghai index is up more than 75% this year, making it the global leader in equity markets; Brazil's market is second with 38% growth. - Research from Bank of America/Merrill Lynch Securities
Small business is not that small. It represents 99.7% of all US employer firms. – Department of Commerce

A new national survey by the Pew Research Center confirms those nearing retirement--not those over 65--are feeling the greatest impact from the recession and stock market meltdown. In interviews in February and March, 75% of those aged 50 to 64 said the recession will make it harder for them to meet their retirement needs, compared with just 56% of those who are 65 or older. 46% of the pre-retirees said the events of the past year had led them to consider delaying retirement. – Forbes magazine

“Goldman Sachs became the first major bank to completely shed its bailout ties, paying $1.1 billion to redeem the government's TARP warrants and calling the Treasury's valuation 'full and fair' given the government's support of the financial system. With the warrant redemption and the $318 million Goldman paid in dividends on its $10 billion in TARP aid, taxpayers received a 23% annualized return for the nine-month transaction.” – Seeking Alpha

Regulators seized seven banks on Friday, including six in Georgia owned by the same parent, increasing the number of US bank failures to 64 in 2009. That’s too bad but all are being taken over by healthy institutions. Consider this…during the 5 years from 1987-91, a total of 1,901 banks and savings & loan institutions failed in the USA or more than 1 per day. - FDIC (Regarding Friday’s report, can you say much ado about not a lot???)

Perspective

“This market move is a LONG way from being done!”

Recently, there’s been much concern about another huge governmental market intrusion into health care spending and regulation, together with limits on carbon emissions. The markets have been rising these last couple weeks because it looks as if these “plans” are dead in the water.

Of course, there’s more than just those.

Let’s look at the NASDAQ – the poster child for this year’s great results, so far. Why is it outperforming the other two major indexes by such a large margin? Let me give you one very good reason. Companies want to be as efficient as possible. How to do that? Beef up your tech, for sure. There’s also been – like a lot of other things – pent-up demand for upgrades to these systems as well.

By the way, even though the NASDAQ has done relatively so far this year, in order to simply match where the Index was in early 2000, we still need another 150% advance from here! The party is not over here, for sure.

On Friday, when Microsoft and Amazon each missed their quarterly estimates – three month numbers are only important for analyst job security – the NASDAQ went down. Did the market crater as it would even recently? Well – no. Momentum came in from all 10 S&P 500 sectors to fill in the blanks – even though it’s summer and volume is low. New areas other than tech – healthcare (see opening paragraph for reason) and energy were a couple.

I am a great fan of is a guy named Brian Wesbury. Brian is an economist who, a) actually speaks so we can understand him and b) isn’t afraid to speak truth in the face of conventional “wisdom.” Let me share with you parts of a recent study of his that I support entirely and without any reservation.

His research uses historical norms for the relationship between stock prices, interest rates and corporate profits. These norms suggest that with interest rates at current levels and corporate profits where they were in the first quarter of 2009, “stocks today are at no more than 50% of fair value.” That’s right - stocks would have to roughly double from here - just to get to fair value.

Like the infomercials say, “wait – there’s more!”

Brian believes that interest rates will be going higher as the economy grows and due to all this government “stimulus.” According to his data, and even using an interest rate of 5.50% for the 10 year US Treasury note – it’s 3.70% as of 24 July so that’s a HUGE jump - the market is still “no more than 75% of fair value.”

To me, the icing on the cake in all this is that the percentage of cash - sitting in savings type accounts at puny returns - right now is at its highest in 30 years! There’s major dry powder available to drive this market higher just from a percentage of that…

New consumers are everywhere. New innovations are coming daily (anyone hear of Twitter a year ago???) and we – the US – is still one of the most innovative countries on the planet. We are totally well positioned to be the global leader for the next phase of the tech r/evolution.

Review what those Tea Leaf guys – except for that goofy Roubini dude – say and check out those economic reports.

There is NO reason for dismay. Become like a market-oriented Wayne Gretzky - go to where the market will be; not where it was…

Remember – Don’t fight the trend. The future is so bright, you have to wear shades!

All my best,

Mike

509-747-3323

Closing values as of 24 July 2009: Dow Jones 9093 NASDAQ 1965 S&P500 979 Oil $68.10/bbl Gold $951.70/oz

Market retrospective - week of 17 July

m.maehl@opus111group.com (Mike Maehl) — Mon, 20 Jul 2009 15:21:00 +0000

Contents: Overview; Tea leaf readings; Economic reports; Perspective, “How do we stack up with the world markets?”

"Advice is seldom welcome and those who need it the most, always like it the least.” - Lord Chesterfield (1694-1773) English Statesman, Author

Overview

What a fun week for the markets!

Even though the traders looked tired by Friday, we still managed to pick up all we lost over the past four weeks – and then some. We had been down about 5% and we closed up over 7%. Trading volume remains seasonally low but – up is up…

Positive comments from a previously bearish analyst on the bank sector got us going and then the earnings from some of the market leaders not only came in positive but, in most cases, better than expected. JPMorgan, Intel, Goldman Sachs, IBM and Google, to name a few, all came in with nice numbers. More important, I believe, was that most of the companies felt that the remainder of the year and into next year looked very good for them.

Stocks go up because their earnings go up. Growth stocks go up not only based on today’s numbers but what the company and the analysts following it see for the future. As the future brightens, the shares go up in anticipation of those rising earnings. I believe that today’s market – and for some time to come – will see growth stocks at the fore. That’s one reason the NASDAQ is doing so well is that the Index is primarily growth and tech issues, aka, market leaders.

As I look at the markets from my perspective of 36+ years of day-to-day participation and advising, I am quite convinced that we’re going to see the economy grow much more than what the prevailing wisdom has it…and ahead of this growth, the equity markets will improve very nicely.

Here’s a few reasons why I quite comfortable saying this. Look for continuing drops in business inventories; increasing exports; home building to bottom soon and begin to rise as starts must rise a lot, just to get to normal and that consumer spending will continue to rise as well.

Bottom line. Get your money out of the First National Mattress and put it to work for you 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.)

“You’ve got a corporate America that’s poised for growth coming into the second half and the first half of next year. Inventory levels are down, companies have right-sized their levels of employment. You’re going to be in place for an explosive growth in a couple of quarters and the best upside surprise will be in technology.” - Art Hogan, managing director, Jefferies

“While markets remain fragile and we recognize the challenges the broader economy faces, our second quarter results reflected the combination of improving financial market conditions and a deep and diverse client franchise." - Lloyd C. Blankfein, Chief Executive, Goldman Sachs Group (announcing profits jumping 65% from a year earlier)

“The Great He-Cession - The unemployment rate for men hit double-digits, 10%, in June, while for women it's 7.6%. The industries that tend to employ lots of men, such as construction and manufacturing (and auto dealerships), have suffered deeper job cuts in the recession than the education and healthcare jobs that employ more women.” – Wall Street Journal

“Crude oil will collapse to $20 a barrel this year as the recession takes a deeper toll on fuel demand. A crude surplus of 100 million barrels will accumulate by the end of the year, straining global storage capacity and sending prices to a seven-year low. Supply is outpacing demand by about 1 million barrels a day.” - Philip Verleger, academic and former US government adviser (He correctly predicted in 2007 that prices were set to exceed $100.)

“Stocks traded outside of the U.S. are worth $14 trillion, or 59% of total value of global shares. (The figures are as of June 30.) Yet the average American has only 11% of their stock holdings abroad…they are missing an opportunity for better diversification and returns.” – Forbes

“Bank stocks are in for, at least, a short-term gain of 15% as the industry benefits from accounting changes and legislation aimed at helping lenders.” – Meredith Whitney, bank analyst (She had been very bearish on the entire sector since early 2007)

"The data showed the (Chinese) economic recovery is stronger than expected. There will be no suspense about achieving the government's goal of 8% GDP growth this year." - " Zhu Jianfang, chief economist, Citic Securities, Ltd.

Economic reports from the past week (with occasional translations…)

“The Dow Jones Industrial Index managed to cement a 7.3% rally this past week that came as earnings season kicked into full gear. The Standard & Poor's 500 and the tech-laden NASDAQ both also capped off strong weeks. For the week, the S&P was up a shade under 7%, while the NASDAQ gained 8% over the past eight sessions.” – Wall Street Journal

US homebuilder sentiment in July jumped to its highest level in 10 months as improved sales conditions boosted confidence in the market for new single-family homes according to The National Association of Home Builders. "Builders are seeing slightly better sales conditions this month as consumers take advantage of the first-time buyer tax credit, low interest rates and attractive home prices." - Joe Robson, NAHB Chairman and home builder, Tulsa, Oklahoma

US business inventories 1% in May, marking a ninth consecutive monthly decline. Business sales slipped 0.1% in May. That pushed down the inventory-to-sales-ratio, which measures how long it would take to clear shelves at the current sales pace, to 1.42 months' worth from 1.43 in April. Companies have been purging inventory and that has contributed to the recession. Many economists expect that pattern to reverse soon, which should help lift economic growth in the second half of the year. - US Commerce Department

Initial jobless claims dropped for the second straight week to levels lower than forecast on a seasonally adjusted basis, while total continuing claims also fell by a record amount to the lowest level since January. – US Labor Department (Continuing drops in initial unemployment claims are positive leading indicators of the change in the economy.)

China's economic growth accelerated in the second quarter amid a stimulus-fueled surge in consumer spending and factory output.

The world's third-largest economy expanded by 7.9% in the April-June quarter from a year earlier. That was up from 6.1% growth in gross domestic product (GDP) the previous quarter.” - National Bureau of Statistics (According to Forbes, many analysts expect China to be the first major country to emerge from the global economic slump.)

Housing starts in June climbed 3.6% from May. Single-family home starts jumped 14.4%, the biggest rise since December 2004. Both overall starts and single-family starts have risen for two straight months.

It was the first time since February-March 2007 that single-family starts posted two months of gains and the first time since January-February 2008 for overall starts. June permits to start construction, an indicator of builder confidence, increased by 8.7%, the highest since December. – US Department of Commerce

Perspective

“How do we stack up with the world markets?”

The media and many government types seem to have the goal of working to diminish our country’s position in the global economic stage. Many people are heard to recycle what they get from those sources as their opinions about our ability to compete, the horrors of outsourcing, the dollar being only good as wall paper and how foreigners “control” us by buying our bonds.

There is always an element of truth in these spin stories but most of it can be traced to the psychological fog those same sources have placed many people.

Let’s start with this fact – not opinion of some misguided media maven. The World Economic Forum, a global economic think tank based in Switzerland, recently announced that the US is number 1 – as in the top – in its annual global competitiveness report. These people have no ax to grind nor advertising space to sell. Could be why that hasn’t been made more of, I’m thinking.

Same church, different pew

Today’s economic environment – in terms of unemployment levels, fear, concerns, change – is highly reminiscent of times in the 1970s and again in the 1980s. I can assure you that those periods were just as uncomfortable as this one is now. The biggest challenge – I believe – is that because we had a period of unprecedented growth from 1982 through 2002, most people of any age have little experience with down markets other than having read or heard of them.

Markets and economies are cyclical – there are downs to follow ups and, as is the case now, the up to follow the down. And, contrary to my governmental and media buddies profess, this is nowhere near as bad as the Depression. Even if the economy ultimately hits over 3% down from its highs, in the 30s, that drop was 25% - and no FDIC or unemployment insurance!!! To attempt to compare the two periods is stupid and irresponsible.

Going back 60+ years, we have averaged a recession about every 5 years. It’s not usually as significant as this one is proving to be but that’s the cycle. The point is that we’ve had them before and we’ll have them again. The longer your investment time horizon, the less impactful they will be.

Debt and housing

The folks at the International Monetary Fund (IMF) tell us that Ireland, Spain, the UK, Australia and some eastern European countries have worse overall housing bubbles than we do/did.

As to the debt levels, the IMFers say that, as a percentage of our GDP, our total government debt will average about 57% - as compared with the median of around 40% over the last 20 years. By the way, in the US, the level was right at 50% in the 80s. For comparison, and according to the IMF figures, Japan will have a ration of 151% with the Euros (16 countries) averaging 66%.

Outsourcing is no biggie

This is the, I believe, natural progression due to a global trade reality. In the US, it’s true that we’ve lost about 6.5 million manufacturing jobs since 1980. The part that the negative types magically overlook is that – over the same period and adjusted for inflation – the total value of what we do put out from our manufacturers is up by 70%!

That’s done because we use technology to give us the greater productivity. The low-skilled and labor intensive jobs have gone to countries that flourish in that environment. The higher skilled and, by the way, higher paying jobs remain here.

Who has the biggest GDP?

You may recall/have read that in the mid to late 1980s, Japan was set to “take over” as the head of the economic pack. Oops! The media blew another one.

Right now, the US GDP – after getting beaten up over the past 9 months – is at $14.3 Trillion. The media and negative government types like to tell us that there are others “poised to take over our leadership role.” I concur that we need to adjust, adapt and tune-up a lot in our education system to help us stay ahead. However, let’s see where Japan is now.

Japan is in the number 2 slot. Their GDP is $4.9 Trillion. As a percentage or just a differential, that’s not even close. From a GDP per capita basis, China still has some way to go as it ranks number 100 of all the world’s countries. Safe to say, they’ll be growing but let’s keep things in context.

Prognosis

We can’t be complacent but neither should we be concerned about our ability to recover. WE will lead the global economy back. WE set the example for innovation, adaptability and flexibility. WE are still the place where the best and brightest want to come to learn and, perhaps, live.

Get rid of your fear – False Evidence Appearing Real. Our economy, our markets are the strongest in the world – media nay saying and governmental bad policies, notwithstanding.
Act in your own best interest and move into the markets today. Do it all at once; do it incrementally – just do it, as the folks in Beaverton say.

Remember – the future is so bright, you have to wear shades!

All my best,
Mike
509-747-3323
Closing values as of 10 July 2009: Dow Jones 8743 NASDAQ 1886 S&P500 940 Oil $63.51/bbl Gold $940.00/oz

Market retrospective - week of 10 July

m.maehl@opus111group.com (Mike Maehl) — Mon, 13 Jul 2009 15:46:00 +0000

Contents: Overview; Tea leaf readings; Economic reports; Perspective, “GM – Part 2”

"Generally speaking, investing in yourself is the best thing you can do. Anything that improves your own talents. Nobody can take it away from you. They can run up huge deficits, the dollar can become worth far less, you can have all kinds of things happen. But, if you've got talent yourself and you maximize your talent, you've got a terrific asset." - Warren Buffett, Investor, Omaha

Overview

We’re now off 5% in the markets over the past four weeks – just in a kind of drift mode until more corporate earnings begin to reveal themselves over the coming weeks. Oil is down 15% as talk of “controlling” speculators, high product inventories and a slow economy continue to push down the price of crude. Other commodity prices moved somewhat lower as well.

The neither unusual nor unanticipated summer weakness has us firmly in its grasp. To try and make sense of the markets when trading volume continues to be exceptionally weak/slow, is like trying to catch the wind. As has been seen over the recent trading sessions, there is very little price movement. The markets are at the “want to get started higher” stage. However, there needs to be a catalyst to set things off.

Analysts are estimating that profits at S&P 500 companies fell an average 34% in the second quarter compared with the year-age levels, according to data compiled by Bloomberg. The companies who beat their estimates and/or put forward favorable estimates will be well rewarded by nicely higher trades over the coming months.

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.)

“In a study of 401(k) plans, 3 million employees with 57 large US companies were interviewed. It was found that, regardless of their age or income, African-American and Hispanic workers have lower participation rates and contribute less to their retirement plans than white and Asian employees.

Asian employees contributed the most - an average of 9.4% of income, followed by white workers with 7.9%, Hispanics with 6.3% and African-Americans with 6%. The contribution and participation gaps led to smaller average account balances for Hispanics and blacks, a discrepancy that is compounded at higher pay rates.” - The study was conducted by the Ariel Education Initiative, the nonprofit associate of Ariel Investments and by Hewitt Associates.

“The economy is on its way to recovery, though some work still remains before a complete recovery will occur.” – James B. Lee, Jr., Vice Chairman, JP Morgan

"I find it shocking anyone would buy a 10-year Treasury yielding 3%. If you dilute the number of anything, its price has to go down. I don't know who has the confidence and comfortability in buying a 10-year Treasury yielding 3.4%, but I think it's absolutely insane.” - Michael Pento, chief economist, Delta Global Advisors (In reference to the 10 year US Treasury auction this past week.)

“Is there any example in the history of our global economy where a government pulled back their fiscal stimulus spending in time to avert price problems? I can't think of one.”…Andrew B. Busch, Global FX Strategist, BMO Capital Markets

“Big oil investors and Asia's central banks and sovereign wealth funds are poised to grow twice as fast as other institutional investors, underscoring how financial power is continuing to shift away from the West.” - Report from the McKinsey Global Institute

"I think this was a very positive report and consistent with the idea that the US recession will come to an end in the next few months." – Mark Zandi, chief economist, Moody's Economy.com (Concerning the widely lower than expected trade deficit.)

Economic reports from the past week (with occasional translations…)

“If you're trying to rebuild your portfolio of U.S. stocks, preliminaries show that growth funds--large-, mid- and small-cap - trounced value funds in the first half of 2009. The best-performing category was mid-cap growth, with the average fund gaining 13.01% from 1 Jan through 30 June. Small-cap growth funds follow closely, with an average six-month gain of 11.44%. Large-cap growth funds produced a total return, on average, of 10.92%.” – Lipper Analytical

“Even as federal debt issuance has ballooned, the government's interest payments have fallen. Despite record borrowing, US net interest payments are set to fall in 2009 to $170 billion from $253 billion in 2008, according to Congressional Budget Office projections. It expects those interest costs to remain flat in 2010, on the assumption that the Treasury will continue to issue large amounts of short-term debt at very low rates. In June 2009, the average cost of government debt fell to 2.69% from 4.04% a year earlier.” – Wall Street Journal

“High output from the first wells drilled at the Horn River basin shale-gas field in British Columbia, announced Thursday, suggests huge potential. Wood MacKenzie last year estimated the region might hold up to 47 trillion cubic feet of reserves. That would put it on a par with Texas' prolific Barnett Shale fields. Combined US and Canadian proved natural-gas reserves have jumped 29% in the past decade according to BP PLC.” - ExxonMobil release

“The US trade deficit unexpectedly narrowed in May to the lowest level in almost a decade, as exports jumped while imports of crude oil and auto parts declined. The gap between imports and exports decreased to $26 billion, the smallest deficit since November 1999, from a revised $28.8 billion in April that was lower than previously estimated. Imports fell while exports rose the most since July 2008.” – US Department of Commerce

Perspective

“GM – Part 2”

On Friday, General Motors Company rose from the bankrupt ashes of General Motors Corporation. Their CEO, Fritz Henderson, said that the new company - which is currently owned 61% by US taxpayers, 12% by Canadian taxpayers and 18% by the UAW – will repay its loans well ahead of the 2015 deadline. He also said that, “the new General Motors will be faster and more responsive to customers than the old one and it will make money and repay government loans faster than required.”

The company plans to keep its best assets and to be rid of an additional 6000 employees, along with 16 plants and related real estate in Delaware, Ohio, New York, Indiana, Pennsylvania, Virginia and, of course, Michigan. GM now consists of just four US brands and will only be offering Chevrolet, Buick, Cadillac and GMC trucks.

Over the past year or so, the US taxpayers have provided about $60 billion in financing, including $30 billion in bankruptcy financing. About $50 billion of the US government financing will be converted into stock in the new company.

An initial public offering that would take the newly private and reorganized GM back into public ownership could happen as soon as the first half of 2010, depending on the market conditions.

So now, all the “old” shares of GM Corporation are worthless as this new venture officially gets under way. After all the money that’s been spent, the lives negatively affected and the economic injury it has caused, it would be nice if all this works out in a positive manner. There definitely is a big pent-up demand for new vehicles – but will they be GM name plates? Simply changing the structure doesn’t bring in buyers. Their competition isn’t just watching all this time.

Among other things, GM is going to have to greatly improve designs, quality of product and be as responsive as the CEO has said they will. The bigger problem, in my opinion, is that the management and union people who brought them to this dismal point are still – to a major extent – in power.

I hope they can change their spots and actually revive a former icon and not just have it on life support for a time…

All my best,

Mike

509-747-3323

Closing values as of 10 July 2009: Dow Jones 8146 NASDAQ 1756 S&P500 879 Oil $59.86/bbl Gold $912.40/oz

Market retrospective - week of 3 July

m.maehl@opus111group.com (Mike Maehl) — Mon, 06 Jul 2009 21:02:00 +0000

Contents: Overview; Tea leaf readings; Economic reports; Perspective, “It’s a bull market”

“Hope is the magic elixir of capitalism and capitalism is optimism monetized”. – Dennis Kneale, Media & Technology Editor, CNBC

Overview
“You may start your engines”

The above phrase is used to begin the Indianapolis 500 race. I use it since this coming week will begin the long anticipated earnings reports for publicly traded US companies. From these revelations – it has been said – we will be able to determine just how the markets and, ultimately, the economy will be doing through the end of the year.

This past week, the markets completed its very best quarter in just about 10 years. While the week itself was less than exciting since the holiday was coming, things should be picking up a bit very soon.

The companies will be reporting how they did this second quarter compared to the year ago period. I think it’s safe to say the results will be lower. There are two keys to be looking for.
If a company puts up better than expected numbers, their stock will likely go up. They may be lower than last year’s but “not as bad” as what the back room types had thought. The other is how do they see their markets developing over the rest of the year and later.

It could be an interesting week, to be sure.

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.)

“Jeremy Siegel, market historian and finance professor at the University of Pennsylvania’s Wharton School, is forecasting an annualized return of 8.0% (after inflation) for the S&P 500 over the next ten years. Siegel sees the S&P 500, which is up 4.0% this year through June 29, ending 2009 up 10 - 12%. Siegel believes that the economy is going to grow faster than expected over the next six months. He sees a V-shaped recovery, but says the upward slope of the V will not be as steep as usual.” – quoted in Kiplinger Magazine

"Equity markets have entered a phase of reality checks, during which the expectation-driven rise from the March lows has to be beefed up by hard economic data." - Gerhard Schwarz, head of global equity strategy, UniCredit

"We're seeing a classic bull-bear battle here." - Tom Schrader, managing director for U.S. equity trading, Stifel Nicolaus Capital Markets

“The summer forecast for stocks is higher. Both the valuations and volatility measures are pointing to a higher market. You've lost some of the impetus, but we'll probably grind higher through the summer. It's more of two steps forward and one step back. The market's widely anticipated ‘pull back’ may not materialize; the market may have caught its breath with the sideways move stocks made in the last couple of weeks.” - Tobias Levkovich, chief U.S. equities strategist, Citigroup

Economic reports from the past week (with occasional translations…)

Stimulus package ~ One of the inherent problems with the Obama Administration’s $787 billion stimulus plan is that 60% of the package was never going to have much of a stimulative effect, according to Congressional Budget Office Director Douglas Elmendorf. With respect to the other 40%, initiatives capable of providing real stimulus will be among the slowest to come online. Contracts totaling $152 billion had been let as of June 19, but only $53 billion has been spent in the four months since the stimulus bill was enacted, according to Recovery.gov. The Department of Transportation has spent just $369 million of the $19 billion it has appropriated for highways, airports and other construction projects.

Oil prices/demand ~ The International Energy Agency slashed its forecast for world oil demand over the next five years, saying that by 2013 global demand will average 87.9 million barrels a day, 3.7% fewer than it expected in December and 7% fewer than it expected last July. Richard S. Eckaus, professor of economics at the Massachusetts Institute of Technology, published a paper titled "The Oil Price Really Is A Speculative Bubble".

He wrote that "there seems to be a preference for the claim that the price increases are the result of basic economic forces: rapid growth in consumption, pushed particularly by the oil appetites of China and India, the depreciation of the U.S. dollar, real supply limitations, current and prospective and the risks of supply disruption, especially in the Middle East." He briefly explored - and debunked - each of those possibilities and wrote that the price of oil is behaving much like any other speculative bubble.

Home prices in the 20 major metros ~ Home prices fell in April at a slower pace than forecast, a sign the plunge in real-estate values is abating. The S&P/Case-Shiller home-price index decreased 18.1% from a year earlier, following an 18.7% drop in March. The measure declined 19% in January, the most since the data began in 2001.

Price declines are likely to keep moderating as demand steadies and distressed properties account for a smaller share of transactions

Pending sales of homes (national) ~ According to the National Association of Realtors, pending sales of previously owned US homes rose slightly in May v. the expectations of it being unchanged. This now makes the fourth straight monthly gain.

US factory orders ~ Orders to US factories increased in May by the largest amount in nearly a year, further evidence that the nosedive in manufacturing is nearing an end. The Commerce Department said total orders rose 1.2% in May, better than expected. The back-to-back increases in April and May were the first consecutive gains in nearly a year.

Jobs data ~ US employers cut 467,000 jobs in June, more than expected, while the unemployment rate rose to 9.5%, the Labor Department said on Thursday. However, new weekly claims for jobless benefits fell in the latest week, largely in line with expectations. Continuing claims for regular benefits fell again. Finally, employers are planning fewer layoffs than at the same time last year.

The point is that the unemployment rate is NOT an indicator of what’s to come but a reflection of what has been. As is always the case in economic recovery periods, it will be the last of the major indicators to turn positive – well after the economy is moving ahead.

Perspective
“It’s a bull market”

This is what’s known as a declarative statement. For those of who still may be having a bit of a tough time getting your mental arms around this, here is some of the rationale for my position.
Our economy has never healed in a perfectly straight line, with all aspects of the economy getting better at the exact same time; it has way too many moving parts. So, let’s consider how some of those parts are doing.

Among the categories that have bottomed include such areas as housing activity and prices, car production, business inventories and capital spending. Reports show that durable goods shipments are improving and family wealth, that is the combination of real estate and investment holdings, was better at the end of the quarter, due to the market movement.
What about the talk about “everyone” is saving and only “buying the basics?”

Let’s look at that a little more closely as well. The top 20% of US income earners are disproportionately – through personal and retirement accounts – large owners of stock. (For the record, the top 20%, 77% of which had two or more income earners, had incomes exceeding $91,705.) According to Tobias Levkovich, these consumers are much more driven by what happens to stock prices than real estate values. Further, since they also make up more than 40% of the 70% that consumer spending represents in the economy, they have a strong impact. They are feeling wealthier and are more inclined to make whatever purchases they are inclined to do.

As Dennis Kneale, the gentleman I quote at the beginning has said – and with which I agree wholeheartedly – “I reject the doomsday proclamations that the consumer psyche has been altered permanently; we want what we want.” There is a pent-up demand in the system that will also aid in the recovery.

The biggest problem I perceive in investors is psychological – it’s as if this recession stuff has never happened before. Well, it has – the problem is that it just hasn’t happened within the memory of most investors…they were in 1974 and 1982. As it happens, we had no long-lived recessions of any sort from 1982 until 2002 - and that was just a speed bump. So, people have no frame of reference.

Those two periods had record high interest and inflation rates and credit defaults that were just as ugly as what has gone on recently. Looking back, it’s easy to anecdotally say well, it all turned out all right. I can assure you we didn’t know that when it was going on.

In terms of cycles alone, I feel I can make the case that we’re going higher. When you look at the 10 worst GDP declines going back to 1958, the fourth quarter last year is included. What’s also important to note - courtesy of the Bureau of Economic Analysis – is that the market was higher in every instance within one year of that bad quarter. The average gain has been 24%. That average gain, based on the year-end close, would get us to about 10,800 on the Dow…that’s up another 30% from Friday.

The fact is that ALL bull markets move higher before fears decline.

By the time many feel it’s okay to get back into the pool, a move has taken place that makes them hesitate even more. The former fear of losing it all has now been replaced by a fear of buying right before we go down again. So, they get frozen by emotional inertia as the markets work themselves higher.

New bull markets tend to keep may people nervous and in their low to no return savings vehicles. Let the record reflect that it takes discipline to step in and buy when the media and their friends are all saying “better watch out.”

In order for you to participate in the bull market, you have to have this discipline. The discipline to be objective – to position yourself for what’s coming and not be concerned by what’s already occurred – is what makes for a successful investment style.

Just so you know. In every recession I’ve experienced, (1974 to date) the previous market high was ultimately passed and exceeded. If that’s the case, we’re about 5,500 points below that on the Dow right now, so don’t feel as if the train has already left the station. There are still plenty of great seats available…

All my best,

Mike

509-747-3323

Closing values as of 2 July 2009: Dow Jones 8280 NASDAQ 1796 S&P500 896
Oil $66.34/bbl Gold $930.40/oz

Market retrospective - week of 26 June

m.maehl@opus111group.com (Mike Maehl) — Mon, 29 Jun 2009 13:18:00 +0000

Contents: Overview; Tea leaf readings; Economic reports; Perspective, “Inflation?”

“An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today.” - Dr. Laurence J. Peters, (1919-1990), Canadian Writer

Overview

“Déjà vu all over again”

Mr. Lawrence Berra, better known by his nom de sport of Yogi, was renowned for his ability to create statements that didn’t sound right at first but do as you consider them longer. I’m borrowing this one to describe the market week – and, truthfully, the two prior to that and likely the one to come. It’s something we’ve just experienced and we’re about to do it again. Think of it in a three part synopsis.

Light volume, no direction, lack of buyers.

There is nothing to inspire the traders right now as there are no economic reports of note coming out in this holiday shortened week. (Markets are all closed Friday in observance of the 4th.) No earnings reports either. These will start being reported in force beginning the 6th. Once those start coming, we’ll learn who is able to grow in this early recovery environment and whose share values will represent a brighter outlook.

So, try and stay awake through this week and, hopefully, some positive fireworks will be in store for after the holiday.

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 Federal Reserve will "employ all available tools to promote economic recovery and to preserve price stability and that it would keep its target rate for overnight loans, currently between 0% to 0.25%, at exceptionally low levels for an extended period.”- Federal Reserve news release after their on Wednesday

"I think the window dressing is a big deal. There's just a force underneath the market that wants to keep it higher." - Joe Saluzzi, co-head of equity trading, Themis Trading LLC
"People are hesitant to take a position one way or the other." - Doug Roberts, chief investment strategist, Channel Capital Research

"The credit crisis is abating and the worst is behind the Federal Reserve." - Michael Feroli, an ex-Fed official, now with JPMorgan Chase

“A careful study suggests that the Fed has decided to stay the current course. Indeed, with no explicit mention of an exit strategy or an indication that the Fed will increase the size of its Treasuries purchases, the stance of the Fed appears to be unchanged. Notwithstanding, it appears that the deflationary fears that may have pervasive only a few months ago among some members may have abated.” - Millan L. B. Mulraine, TD Securities

Economic reports from the past week (with occasional translations…)

Market moves ~ JPMorgan Securities said that they believe the Standard & Poor's 500 was facing a correction that likely would take it to between 830 and 875, which would represent a 5 to 10 percent drop from its current level. A rally likely would follow the drop and take the S&P to 950 to 1,000 by the end of the year.

Consumer Confidence Survey ~ Consumer confidence rose in June to the highest since February 2008. The Reuters/University of Michigan Surveys of Consumers said its final index of confidence for June was at 70.8 from 68.7 in May, equaling that of February, 2008.

"Such a sizable gain has usually indicated that an end to the economic downturn is on the horizon, as consumers begin to increase their spending on houses, vehicles, and large household durables," the Reuters/University of Michigan Surveys of Consumers said in a statement.

Personal Savings Rate ~ The Commerce Department reported that personal spending, incomes and savings all rose in May. Personal saving rate is now 6.9%, the highest since 1993, compared to zero early last year. This rise will help support consumer spending in the year ahead.

Q1 Gross Domestic Product ~ The economy contracted at a 5.5% rate, the Commerce Department said in its final reading on first-quarter GDP. That was a smaller contraction than the 5.7% initially reported.

Treasury auction ~ There was solid demand for three Treasury auctions this past week. In all, the government sold a record $104 Billion worth of debt. The successful auctions helped boost confidence in some that Washington will be able to raise enough money to fund its economic recovery programs.

Durable goods orders ~ According to the Commerce Department, new orders for durable goods, such as transportation equipment, machinery and metals, rose 1.8% in May. Those suggest companies in the US and abroad are becoming more optimistic about business and sales.
Orders climbed for the third time in four months. The gain was driven by higher orders for aircraft, machinery and computers, which helped offset a slump in demand for autos.

Existing home sales ~ The National Association of Realtors reported that, for the second straight month, sales rose. They increased by 2.4% in May. The inventory of exiting homes for sale also moved lower.

Perspective

“Inflation?”

For whatever reason they select, people seem to becoming more concerned about potential inflation issues and not the deflation that many were all up in arms about just four or five months ago. I didn’t ever believe that deflation was going to be long-lived. Right now, I don’t think inflation is a threat either. Having said that, it’s the one I am setting my long-range detectors for, however.

The Fed thinks that with unemployment as high as it is – and will likely become before peaking - along with the large amount of currently idle factory space, there is probably little near-term risk of prices overheating. That gives the Fed the ability to keep borrowing costs low until it believes that the economy is strong enough to handle an interest rate hike.

Matter of fact, according to economists advising the American Bankers Association, there may be four consecutive quarters of positive US economic growth before the Fed is ready to budge, probably in the third quarter of 2010. I think that’s a little long myself but that’s my opinion.
Nobel prize-winning economist Milton Friedman believed that inflation is “always and everywhere a monetary phenomenon. Persistently creating too much money chasing too few goods will, over time, push up inflation.”

Current Fed policies will likely produce some inflation. Before we need to really worry about it, we’ll need to see some evidence that home prices have stabilized. We’ll also need to see more evidence that normal lending policies are returning, without government intervention. And then, government being government, the Fed will probably hesitate in its changes to policy with the rate of inflation eventually getting higher than what many would prefer. I don’t think that whomever is at the Fed will let things get to the hyperinflation stage.

Stocks are a great inflation hedge and this is yet another fine opportunity to check your asset allocations. Strictly from a valuation standpoint, stocks definitely appear more attractive than any fixed income instrument alternative over the next five years. You get a store of value in stocks. It’s not just the dividend “while you wait”, but the capital appreciation for you to draw upon at a later time.

There is still plenty of liquidity to help move the stock market higher. Historically, initial periods of monetary stimulus like we’re in now are usually great times for stocks. Those periods where inflation ranges from 0-4% is associated with some of the best times in the stock market.

There is never a “best” time to buy. I heard something once that I’ve always thought made sense along those lines and that is that “the best time to buy is when you have the money.”
If you only wait for the times of economic certainty to invest in the stock market, your performance would be dismal…the largest part of the move up has already occurred by then.

All my best,

Mike

509-747-3323

PS If you, or someone you know, has suffered the death of a spouse, been divorced or changed jobs and has a retirement plan they’re not sure what to do with, please let them know I can be of help. Thank you.

Closing values as of 26 June 2009:
Dow Jones 8434 NASDAQ 1838 S&P500 918 Oil $69.35/bbl Gold $941.40/oz

Market retrospective - week of 19 June

m.maehl@opus111group.com (Mike Maehl) — Tue, 23 Jun 2009 13:25:00 +0000

Contents: Overview; Tea leaf readings; Economic reports; Perspective, “Reform and regulation”

“You can never plan the future by the past.” – Edmund Burke (1729 – 1797) Irish political philosopher and statesman

Overview

“Running in place”

The markets continued their lack of movement this week. The averages finished a bit lower than last but the difference was nothing significant; the Dow being down 3% was the “worst” of it. Oil ran into some profit-taking while gold was about unchanged. I don’t think we’ll see much stock movement in any direction until the second quarter earnings reports begin in earnest after the 4th.

We did have two pieces of good economic news this week. One was the drop in total unemployment, breaking a string of 21 straight increases in continuing claims. The other was the Index of Leading Economic Indicators – designed to forecast activity in the next three to six months – rose more than expected and the highest increase since 2004.

It wasn’t that long ago that we were in a similar sideways situation in the markets. About eight months after the big decline of July, 2002 – as we are now – the markets were back to even with where they were. In market history, it takes about eight to nine months after a big blow off to start getting some traction back to the upside.

Using history again, looking at the markets of 1974 and 1982, we again have beaucoup money parked in various places all earning, effectively, nothing. These were also the only other times that stocks have been as cheap as they have been over the recent period. Further, from an analytical standpoint, a sideways market is usually seen as a positive indicator.

I can’t pinpoint the time when the market really digs in and starts getting back up toward its previous highs but, in my opinion, it’s a whole lot sooner than later.

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.)

"With all the carnage we went through, this is the opportunity of a generation to own great companies at just ridiculously low valuations. Wall Street can deal with recessions—we had 10 in the last 60 years. The abyss, the true crisis mode, is over." - Nadav Baum, managing director of investments, BPU Investment Management

"Despite significant weakening in the near-term economic outlook, projected fiscal deficits and the high fiscal costs of government support of the US financial sector, we still believe that the US government's credit strengths continue to outweigh its weaknesses." - Nikola Swann, analyst, S&P. (The rating agency cited the US dollar's reserve status and the US economy's openness to trade as supporting the AAA rating, which has traditionally given US Treasury bonds the status of a safe-haven investment.)

“The jobless-benefit rolls always stabilize or decline right around the end of the recession." - Abiel Reinhart, economist, JPMorgan Chase & Co

“I look at the [market weakness] as a buying opportunity. I’ve been bullish for a while … When the March lows were set and when we climbed out of there, we saw the worst past us.” - Gary Hager, president and founder, Integrated Wealth Management

“There is an inverse relationship between revenues and taxes. Revenues are determined by economic growth and capital appreciation which is impelled by innovation. Higher tax rates do nothing to raise revenues over any significant period of time (more than one year).” – George Gilder, co-founder, Discovery Institute

“Risk aversion has eased, while inventory rebuilding and new business spending bode well for an economic recovery that could provide a dramatic surge in corporate profits by year end.” - Abby Joseph Cohen, senior investment strategist, Goldman Sachs

“To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the NASDAQ bubble.” – Paul Krugman, in 2002, Nobel Prize in Economics (accountability not a requirement for the prize)

Economic reports from the past week (with occasional translations…)

Housing starts ~ According to the Commerce Department, US builders broke ground on more houses than forecast in May, offering a sign that the industry’s slump, now in its fourth year, may be approaching an end. The 17% increase in housing starts to an annual rate of 532,000 followed a 454,000 pace the prior month. Building permits, an indicator of future construction, also rose more than estimated.

Inflation indicators ~ US wholesale prices rose less than anticipated in May as food costs dropped. The Labor Department reported that its producer price index, (PPI), fell 5% over the last year, the biggest slide since 1949.

The cost of living in the US, as measured by the Consumer Price Index, (CPI), rose less than forecast in May, culminating in the biggest 12-month drop in prices since 1950. The CPI is the broadest of the three monthly price gauges from Labor because it includes goods and services.

TARP funds ~ Ten of the largest U.S. banks, including Goldman Sachs, JPMorgan Chase and Morgan Stanley, repaid billions of dollars in taxpayer bailout funds Wednesday, getting out from under the government's thumb. Banks have been anxious to return funds taken from the $700
billion Troubled Asset Relief Program to escape the many strings attached, including restrictions on executive compensation.

State taxes ~ Faced with gaping budget holes, 23 states have raised taxes this year and 13 more are considering doing so as they set out to approve 2009-2010 budget agreements, according to a report by the Center on Budget and Policy Priorities, a liberal think-tank. In most cases, the tax increases come on top of cuts in public services. The raises include income, sales and business taxes and take aim at anything from slot machine licenses to motel room taxes. Another popular target is alcohol and tobacco.

California ~ Moody’s warned California’s credit ratings could face a “multi-notch” downgrade if the state legislature can’t agree on a budget soon. These comments come of the heels of a similar warning made by S&P earlier in the week as the state battles its current budget shortfall.
Moody’s cautioned that “the state's cash situation will deteriorate to the point where the controller will have to delay most non-priority payments in July.” Such a downgrade would make California ineligible for more favorable interest rates, pushing the cash-strapped state’s borrowing costs up.

Perspective

“Reform and regulation”

I chose Mr. Burke’s comment for this week’s note as I believe that’s what the DC types are doing now with their calls for reform…trying to “fix” the future based on the past.

Beginning last year with the mark-to-market accounting fiasco and allowing Lehman Brothers to fail – among other things – I’m of the opinion that government is what led us into the type recession we’ve had. As Groucho Marx once said: “Politics is the art of looking for trouble, finding it, misdiagnosing it and then misapplying the wrong remedies.” That started last fall and has been massively compounded since January.

These people have NO grasp of the financial markets and how they inter-connect. You have politicians who are driven by polls being advised by professors and lawyers. None of them – okay a minute percentage of them, maybe – have ever managed investment funds, made buy and sell decisions about stocks professionally or, God forbid, had to deal directly with an investor. And yet, these ivory-tower commandos are trying to dictate to and regulate a complex, multi-faceted industry.

Further, the people assigned to create all this regulation seem to come from the “government knows best; all consumers are potential victims” school of illogic. These are representatives of the same group who brought us – and want to revive – the Community Reinvestment Act. (See the Paul Krugman quote in Tea Leaves.) That was the law that forced banks and other lenders to make loans to “under qualified” borrowers and led directly to the housing challenge. Oh yes, please may I hear more “wisdom” and “guidance” from those people…

Proper rules of the free market, capitalistic world should ensure that people – and companies – pay for their own mistakes…not government. Arthur Seldon, a British economist, said, "risks which cannot be removed or shifted profitably must be born by the entrepreneur. He will generally do so only as long as his expectation of profit outweighs the chance of loss." If the Feds take that risk away through short-minded regulations designed to fight the last war, so to speak, you don’t have capitalism.

And please understand that capitalism hasn’t failed in this recession – government has. The recovery has been created through a strong monetary policy response – due to smart people at the Federal Reserve, primarily – and the normal types of events that occur in the latter stages of a recessionary recovery.

Minimal stimulus money has hit the economy, so far. The spending bill that just “had to be passed” last fall has had no discernible impact as yet. And, due to its size, the degree to which it ultimately proves to be helpful is open for debate.

I hope that, during what will be a long and spirited debate about all these high-cost, low benefit reforms, knowledgeable people with influence will be able to prevent the government from creating more long-term problems with their “good intentions.”

All my best,

Mike

509-747-3323

PS If you, or someone you know, has suffered the death of a spouse, been divorced or changed jobs and has a retirement plan they’re not sure what to do with, please let them know I can be of help. Thank you.

Closing values as of 19 June 2009:
Dow Jones 8539 NASDAQ 1827 S&P500 921 Oil $69.40/bbl Gold $934.30/oz

Market retrospective - week of 12 June

m.maehl@opus111group.com (Mike Maehl) — Tue, 16 Jun 2009 16:40:00 +0000

Contents: Overview; Tea leaf readings; Economic reports; Perspective, “Recovery without government spending”

“The one law that does not change is that everything changes and the hardship I was bearing today was only a breath away from the pleasures I would have tomorrow and those pleasures would be all the richer because of the memories of this I was enduring.” - Louis L'Amour (1908-1988) American Author

Overview

“It’s about time”

The markets are in a lull between earnings report times and are focusing almost exclusively on economic reports. The economic reports have generally been good with the net result being that such action as there was in the averages last week moved the Dow Jones Industrials, the S&P 500 and NASDAQ up for the year. It was quite a tough slog but we’ve made it.

Given the lack of any significant market moves this past week – up or down – as a result of those reports, the trend continues sideways for now. A bull market needs volume to thrive and, until market participants feel more motivated to participate, sideways will rule the day.

Nonetheless, it looks as if we may have just received additional fuel for a near-term continuation to the upside.

This has to do with some technical market data. The NASDAQ’s 50-day moving average crossed over its 200-day moving average last week. It seems likely to me that we’ll see the same type of move for the Dow and S&P very soon. The reason for the move is that the market traders often look at these moving average crossovers as bullish - or bearish - indicators.

In this case, a move of a shorter term moving average (the 50-day) above a longer term average (the 200-day) is seen as bullish. This kind of crossover is an indication of positive market momentum and could help to drive the markets even higher as other traders react.

Stay tuned for the exciting conclusion!

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 US economy will beat China and other economies in shaking off the recession and returning to growth. The American economy is the one that’s looking best in the world at the moment.” - Roger Nightingale, strategist, Pointon York

"We're in this cross current. There's still a ton of money on the sidelines. A lot of professionals don't believe this rally is true. From a short-term perspective, it's anybody's guess. If I had to be a betting man on the near term I would say we're due for a modest pullback. A lot of the technicians out there can only buy if you trade above the 200-day moving average."" – John Buckingham, chief investment officer, Frank Asset Management (See comment in Overview)

“I think growth is likely to warrant (interest) rates as low as they are now for some time. We'll just have to wait to see how the growth process unfolds.” - Jeffrey Lacker, President, Richmond Federal Reserve Bank

“We’re absolutely in a bull market and U.S. stocks will rally for another couple of years. Anxiety is in the part of the people who have missed the rally and they’re trying to talk the market down so that they can get back in.” - Laszlo Birinyi, President, Birinyi Associates

“We’ve calmed down the healthy players that were frozen with fear, so the 91 percent who have a job throughout the crisis are beginning to spend again.” - James Paulsen, Wells Capital Management

“The US economy is in the midst of recovery. We’re at a point where there’s much greater stability. People are now starting to ask, 'maybe I can earn more than zero?' Armageddon is behind us." - Laurence Fink, CEO, BlackRock (On Friday, his firm put their money where their mouth is and acquired Barclays Global Investors for $13.5 billion.)

“The sky is not falling — it’s rising. Ninety percent of all stocks are above their 10-day moving average, which means we’re not going to have any more corrections above 5 to 6 percent—that’s historically a fact.” - Harry Clark, President/ CEO, Clark Capital Management Group

"Market participants' concerns are shifting from a potential lengthening and deepening of the recession to the inflation that might be stoked by a rapid recovery. In the past, high and rising inflation has proven to be a far harder problem to solve than a weakening economy in recession." - Jeff Kleintop, Chief Market Strategist, LPL Financial

"This is quite easily the biggest combined fiscal stimulus the world has ever seen in modern times. That liquidity will impact anything that is sensitive to it, ranging from short-term fixed-income securities through stock prices through property prices and into people's personal wealth." - Jim O'Neill, Chief economist, Goldman Sachs

Economic reports from the past week (with occasional translations…)

National Federation of Independent Business - An index measuring sentiment among small business owners gained for the second consecutive month, moving just below a level that would indicate positive growth in the economy.

Citigroup – The bank swapped $58 billion of its preferred stock into common, and the Treasury converted a portion of the $25 billion of Citigroup preferred it holds, to give the Feds a 34% ownership. This closes the debit noted as a result of the recent bank stress tests.

Oil prices – Oil closed at its highest levels for the year. The surge in price is being driven by a combination of oil being seen as a hedge against inflation along with the International Energy Agency having raised its global oil demand forecast as a result in improving global economics.

Retail sales –Sales numbers rose in May after having dropped in April. This is seen as another indicator of an improving consumer sector.
Initial unemployment claims – For the third week in a row, this number has fallen and it fell much more than had been forecast.

Chrysler - Chrysler and Fiat finalized their government-brokered alliance a day after the U.S. Supreme Court removed the deal's last remaining obstacle. Chrysler will now operate as Chrysler Group LLC.

Perspective

“Recovery - without government spending”

Let’s consider where we are right now.

Since hitting its low point in February, consumer confidence has had the fastest three-month increase ever. The Institute for Supply Management's manufacturing index, which had fallen to historic lows over the winter, has risen. It’s another indicator that the overall economy is now expanding.

In the financial markets, the yield on the 10-year Treasury note is back up to 3.81%, almost exactly where it was in August, 2008, just before the wheels came off the markets. Additionally, key commodity prices, such as oil, copper, lumber and gold are well off their lows.

US companies have reacted to the easier money with new issues of stocks and bonds. In May, according to Dealogic, more new stock was issued by existing companies in US markets than at any time since 1995, when the company began keeping records.

Some of the market gains, of course, reflect choices of investors who believe that the worst of the global recession is over and that investments tied to global growth will be big beneficiaries.

In general then, the economic scene is quickly returning to where it was in September, 2008 – before the horror show started.

Today we have the short-sellers (those who only make money when a particular security or market index is down), together with those many money managers who weren’t ready for the nearly 40% rally of the past three months and have been waiting for a drop, continuing to argue that the stock market will go back to test its lows. Or, they think (hope?) a sharp correction is in order. But this seems to be more of a wish than a legit forecast.

Any short-seller who hasn’t covered their open positions, along with the aforementioned equity managers, has taken a major hit. The only way for them to climb out of that hole is for the market to provide lower prices. The challenge is that with having so many investors in the position of having missed the rally – professional and non-professional alike – this makes a re-test of the lows less likely. This rally won’t be over until these short-sellers throw in their towels – probably along with the rest of their laundry.

My point is that we’re well on the way to recovery - and with no Federal spending having been required. Let me explain a bit.

A new Congressional Budget Office study shows that, through late May, only about $37 billion – that’s just under 10% of authorized spending under the grandly named American Recovery and Reinvestment Act of 2009 (ARRA) - has been spent. In fact, the Departments of Education, Transportation and Energy have spent 2%, or less, of their combined allocations.

In the heat of last fall’s market gyrations, many said that we “needed” this fiscal stimulus and that there was no way we would recover without it. Our current Vice President indicated that virtually all economists agreed with this view. (Not exactly) Given our improved and improving economic outlook, i.e., due to a normal recovery after a recession, it appears to me that haste of passage is going to prove to be a significant and very expensive public policy mistake.

The spending bill was promoted under the (I believe) old-fashioned view that only the federal government was capable of digging us out of the hole that we had gotten ourselves into and that excavating job could only have been done with massive federal spending.

One of the reasons we’re hearing about inflation for the first time in many years is due to the fact that there is this tsunami of money sitting out there - and it’s not really needed. It will come flooding into the economy and help drive many things higher – to include the markets for a time. However, any politician who claims that the ultimate recovery was caused by the ARRA is not exactly being forthright. That would have happened anyway – history shows that to be true.

The good news is that since the impact of this monetaqry tsunami is still somewhat long in coming, the Federal Reserve may be able to be light-footed enough to get us through it. No one really knows. There will be higher interest rates as a result of all this money, in order to fight inflation – but not too soon.

The markets are efficient – unlike government – and to try to influence them through “actions” of government has always proven to be pretty much of non-starter.

In the interim, enjoy the positive fruits of the recovery and invest now to benefit from it.

All my best,

Mike
509-747-3323

PS If you, or someone you know, has suffered the death of a spouse, been divorced or changed jobs and has a retirement plan they’re not sure what to do with, please let them know I can be of help. Thank you.

Closing values as of 12 June 2009:
Dow Jones 8799 NASDAQ 1858 S&P500 946 Oil $72.25/bbl Gold $939.40/oz

Market retrospective - weeek of 5 June

m.maehl@opus111group.com (Mike Maehl) — Tue, 09 Jun 2009 13:30:00 +0000

Contents: Overview; Tea leaf readings; Economic reports; Perspective, “The real risk is being in cash”

“Become a possibilitarian. No matter how dark things seem to be or actually are, raise your sights and see possibilities, always see them, for they're always there.”
- Norman Vincent Peale (1898-1993) American Preacher, Writer

Overview

While, overall, the week was fairly quiet, we did manage to finish higher, so we’ve now been up 11 of the last 13 weekly market sessions.

We did get a nice big blast on Monday to start the week and month.

The first trading day of the month often brings with it a big chunk of new money from mutual funds, especially those in 401(k) plans. This month it appeared that a large part of the money went into stock funds. That flow helped the S&P and Dow break through their 200-day moving averages for the first time in well over a year. (Moving averages are closely watched technical barometers for market trends. Some traders use strategies to automatically buy or sell if those levels are penetrated.)

I do firmly believe that we’re still going higher. I also believe that we can see profit-taking take place, either in a sideways market as people reallocate their profits, or in a more defined selloff. It matters not. The trend is still firmly and strongly higher.

By the way, also on Monday – “as you may have heard” – GM did file for Chapter 11 bankruptcy. As it stands now, the administration will spend a bit more than $30 billion to fund the bankruptcy and in exchange receive 60% of GM's stock. The Canadian government will put in $9.5 billion for a 12% piece and the UAW pretty much controls the rest. I think the government involvement is totally inappropriate and sets taxpayers up for a chance to throw huge amounts of good money after bad. Right now, if you could buy the new GM stock, it would qualify as a speculative investment, at best.

A fine example of just how well this government “business management” works can be demonstrated in the ongoing boondoggle known as Amtrak. This year, that fine institution is expected to lose yet another $476 million. It’s never, ever been profitable while run by the Feds over multiple long years. While chump change compared to what’s already been burned by GM, I’m afraid it’s a preview of what’s to come from our now, Government Motors…

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.)

Consumer Reports ~ The magazine recommends 70% of Ford’s vehicles, but only 19% of GM’s. Finances are only one of GM’s many challenges.

Microsoft ~ The company said its new Windows 7 operating system will be generally available on 22 October, well ahead of its original schedule and in time for the holiday shopping season. The new operating system will replace the (polite term) unpopular Vista. No word on what affect this will have on Apple’s ad campaign…

“For the time being, US macro-economic data seems to be what’s driving crude prices and not the fundamentals, which look uninspiring at best. For now, it is inadvisable to stand in the way of what seems to be investor money clearly piling into commodities.” - Edward Meir, analyst with MF Global Ltd.

“I think everyone’s waiting for a pullback so that they can get in. So, that tells me we’re not going to get much of one — and if we do, it’s not going to be as big as people expect.” - Scott Billeadeau, managing director, Fifth Third Asset Management

“At some point, it's hard to fight the trend and the trend over the last couple of months has been up. People don't want to be left out.” - Ryan Larson, senior equity trader, Voyageur Asset Management

“Inflation is likely three to five years down the road and investors should stay relatively close to the front end of the yield curve where the bond prices are protected by the Fed position of low Fed funds and interest rates.” - Bill Gross, co-CIO and founder, Pimco

Economic reports from the past week (with occasional translations…)

Personal savings rate ~ For the April period, it increased to 5.7% from 4.5% in March. It was the highest monthly increase since 1995.

Energy Information Administration ~ Oil soared to seven-month highs earlier this week -double its price in March - on investor expectations that the economy is stabilizing. The EIA also said Wednesday that the amount of crude oil being held in storage unexpectedly rose by nearly three million barrels last week. That’s about 20% above year-earlier levels, suggesting demand remains sluggish. (Nonetheless, a prediction from Goldman Sachs Group Inc. this week said that crude may reach $85 a barrel by the end of the year.)

Initial unemployment claims ~ For the third straight week, fewer Americans filed claims for unemployment benefit. This suggests that the worst of job losses may be over.

Even better news, in terms of the trend of unemployment, is that the number of people actually collecting unemployment insurance fell for the first time in almost five months, breaking a string of 17 consecutive record months of increases.

Worker productivity ~ According to the Department of Labor, productivity, a measure of employee output per hour, rose at double the gain estimated last month.

National unemployment rate ~ Also from the US Labor Department, the report for May showed job losses dropping at the lowest rate since September, 2008. However, the national unemployment rate moved up to 9.4%. This is the highest level since August, 1983, when we last had a tough recessionary period. It’s important to understand that this rate will continue to go up for a period because it’s a lagging indicator. This means it reports data that are based on past events. It will be the last major indicator to turn positive.

Pending sales of previously owned homes ~ April unexpectedly had the biggest monthly gain in 7 1/2 years, according to the National Association of Realtors. It was the biggest monthly increase since October, 2001, taking the index 3.2% above its year-ago level.

China and US Treasury paper ~ China – along with Japan, India and South Korea - all said in separate interviews that they would “keep buying US Treasurys even if the US credit rating were to be cut.” Those comments this week were viewed as an expression of support for all the dollar-denominated assets of these nations that, collectively, control about half of the world's currency reserves. Federal Reserve data show foreign central banks added about $69 billion to their holdings of Treasurys in May. They don’t seem too afraid to me.

The grandstanding by the locals around the Treasury secretary’s visit to China this week was really for domestic consumption. It seems pretty obvious that, as long as China continues to run a trade surplus and control its currency by buying up the dollars generated by that surplus, it has little choice but to park the proceeds in US Treasurys where they know they’re safe.

Perspective

“The real risk is being in cash”

Here’s my benchmark.

The bear market ended March 9 and the “official” end of the worst recession since the 70s is within sight/reach/grasp. I think it’s already dead, personally.

Many people are using the rear-view mirror and deciding that if Treasuries were good last year, they’ll still be good today. Not a solid investing approach. My good buddies at Merrill Lynch – the former brokerage firm currently part of a bank – have created something called the US Treasury Master Index. The Master says that Treasuries – so far this year – have provided investors with a total return of MINUS 5.3%. My point is that nothing is always a good investment…

And consider this.

Because of how the Feds are keeping short-term rates at basically zero, many – a lot – of money market funds are not paying any return. (Their return would be negative too if the fund managers hadn’t elected to waive their usual management fees…) I guess the thinking is that, as long as it doesn’t go down, I’m okay.

Don’t let the media keep you from making good decisions by telling you that GM’s bankruptcy will really mess up the economy. GM is an out-of-date company. They’re a 19th century technology, using mid 20th century systems to try and survive in the 21st century. Sure, unemployment numbers will go up for a while as a result of their bankruptcy ripple effect but, in the big picture, it’s no biggie. There are 25,000 remaining employees. There are millions working for the new economy companies of Microsoft, Cisco, Wal Mart, Home Depot, Apple, et. al.

To the point, earnings yields on high quality companies still remain comfortably above the yield on 10-year Treasuries. Based on my experience, they should have the ability to absorb higher interest rates driven by economic recovery. Your total return potential, growth plus dividends, remains excellent.

It’s summer. You know how you dip your toes into the pool, lake or ocean to get used to it? And then, once you’re in, it’s quite refreshingly comfortable. I think the same can be true with your investing.

Start getting your monetary toes wet now. If you have one, step up your 401(k) contributions into the best options you have – you’ll automatically be buying the dips. Even if you don't, look for some of the many good quality choices that are now available. Make sure that you will participate in the recovery.

And again, in the spirit of summer, remember that…

The future’s so bright – you have to wear shades.

All my best,

Mike
509-747-3323

PS If you, or someone you know, has suffered the death of a spouse, been divorced or changed jobs and has a retirement plan they’re not sure what to do with, please let them know I can be of help. Thank you.

Closing values as of 5 June 2009:
Dow Jones 8763 NASDAQ 1849 S&P500 940 Oil $68.58/bbl Gold $955.70/oz

Market retrospective - week of 29 May

m.maehl@opus111group.com (Mike Maehl) — Mon, 01 Jun 2009 15:36:00 +0000

Contents: Overview; Tea leaf readings; Economic reports; Perspective

“You cannot help the poor by destroying the rich. You cannot strengthen the weak by weakening the strong. You cannot bring about prosperity by discouraging thrift. You cannot lift the wage earner up by pulling the wage payer down. You cannot further the brotherhood of man by inciting class hatred. You cannot build character and courage by taking away people's initiative and independence. You cannot help people permanently by doing for them, what they could and should do for themselves.” - Abraham Lincoln

Overview

What a week! All the indexes, along with most of the major commodities, moved higher.

The Dow Jones Industrial Index gained 2.7% this week and 4.1% during May. The S&P 500 was up 3.6% this week and 5.3% for the month. The NASDAQ added 4.9% and 3.3%, respectively. This was the third month in a row with market gains. Matter of fact, only the Dow is down for the year - and just slightly so.

Crude prices jumped 30% this month – the fourth month of increases. Gold was up as well, to its highest point in three months.

Interpreting all this says to me that we are definitely trending better in terms of the US economy and stock markets…and will continue to do so. The global economic recovery potential has boosted the oil prices as well. Gold is moving up in concert with the oil prices.

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 system has had an incredible adrenaline shot, so I think we’re going to have a pretty strong recovery. I see the near future as brighter, with a powerful comeback in equities because of government stimulus packages around the world.” - Barton Biggs, former chief global strategist for Morgan Stanley, now with Traxis Partners LP.

“We’re confident we are in a bull market. US stocks are at the start of a new market that may spur an 88% advance in the S&P 500 Index in the next two or three years.” - Lazlo Birinyi, founder of research and money-management firm, Birinyi Associates Inc.

“After the run up we have seen since March, it’s quite logical that we have some consolidation” in stocks. We see some cracks here and there and it’s quite likely we see some consolidation over the next couple of weeks. It could last for one or two months.” - Phillip Baertcshi, senior equity strategist at Bank Sarasin, Zurich

“Sharp gains in confidence typically occur right at the end of a recession. These gains are due to jumps in expectations, which is also what is happening now.” - Abiel Reinhart, JP Morgan

“The May consumer confidence report is another indicator that suggests that the recession's grip on the economy has slackened significantly and that the recession may be drawing to a close. While the labor market indicators still point to significant job losses, both the jobs components of this report and the weekly data on initial jobless claims suggest that the peak rate of job loss is now behind us.” - RDQ Economics

"We will come out of this rid of some of the historic legacy costs that have been dragging us down for the last 20 years or so. We will come out of it with an all new focus on product development." - GM Vice Chairman Bob Lutz

Economic reports from the past week (with occasional translations…)

Consumer Confidence Makes Biggest Gain in 6 Years ~ US consumer confidence in May moved to its highest level in six years as the strains in the labor market showed signs of easing. Fewer Americans said jobs were "hard to get," the survey found.

Existing-home sales ~ Sales in April rose 2.9% to an annual rate of 4.68 million in April, up from a downwardly revised 4.55 million pace in March. The median home price dropped 15.4%, year over year, to $170,200.

US credit rating ~ Moody's Investors Service affirmed the AAA credit rating of the United States, minimizing fears about our creditworthiness that have been creeping up in financial markets. The rating agency said the US economy's “long-term resilience and key role in global affairs should bolster its ability to resume a strong performance following the current recession.” No one else can say that…

Durable goods orders rise ~ New orders for long-lasting manufactured goods had their biggest gain in 16 months in April. The Commerce Department said new orders for durable goods rose 1.9%. That’s the biggest percentage advance since December 2007.

Initial unemployment claims ~ The Labor Department reported initial claims for state unemployment insurance dropped in the week ended May 23, falling for a second straight week. Changes in continuing claims always lag shifts in initial claims. So, while initial claims appear to have already started a downward trend, more evidence supporting the ending of the recession, continuing claims may not peak for several months.

US GDP ~ Our Gross Domestic Product, the total goods and services created within US borders, dropped at a 5.7% annual rate, the Commerce Department said. That was less than the 6.1% estimated by the Feds last month and much better than the 6.3% drop in the fourth quarter.

Consumer confidence ~ Consumer confidence in the US improved in May to its highest level since last September. This is a leading indicator of consumer spending, which accounts for about 70% of our economic activity.

Perspective

On Friday, GM’s common stock closed at 75 cents per share, the lowest since April, 1933. After Monday, the only value those common shares will have will be as memorabilia. Kind of hard to believe, isn’t it?

The company will no longer be part of our everyday lives. It will be removed from the Dow Jones and S&P Indexes. It has moved into the realm of Cord, Tucker, Hupmobile and others. Cars produced by GM – and Chrysler – have now become collector’s items of a sort.

GMs will be the largest industrial bankruptcy we’ve ever had and the 4th largest of any type.
However, because it’s been coming for a while, it won’t have the relative impact of the Penn Central bankruptcy in the mid-70s. No one expected that. The company had been the largest, most prestigious name in the railroad business – an icon - and then, literally overnight, it was gone.

Have you heard anyone talking about the Penn Central lately? How many investors – who aren’t rail buffs – even know the company existed?

My point is that this event – highly painful as it is for all directly impacted by it – has happened before. The economy and the market have been through such events in the past and moved on.

GM says they’ll be better when they come out of this. I hope so since the April issue of Consumer Reports, which includes rankings of 2009 models, rated Chrysler as the worst automaker and GM the second lowest. Seems like all they can do is to improve.

In terms of the overall market, we’re transitioning too. We’re moving from the bear into the bull. Unemployment, GDP and other news still isn’t great but it’s definitely turning better. As we see the estimates for improved earnings from companies – as if by magic – the economists also start seeing things more positively and even the media ultimately catches on.

Like GM – though not as traumatically – the whole market is going through an evolution. We’re evolving from the dark cave that the bears live in out into the brighter climes that favor the bulls.

To be a successful investor requires that a person have a positive outlook – not just on the markets. While we’ve all been tested over this past year or so, I know my positive view about the upward direction and trend of our economy and market remains totally positive.

Come out and enjoy the sun! The trend is definitely your friend…

All my best,

Mike

Closing values as of 29 May 2009:
Dow Jones 8500 NASDAQ 1774 S&P500 919 Oil $66.31/bbl Gold $979.40/oz

Market retrospective - weeek of 22 May

m.maehl@opus111group.com (Mike Maehl) — Tue, 26 May 2009 18:47:00 +0000

Contents: Overview; Tea leaf readings; Economic reports; UK credit rating mess; GM again; Perspective; Conclusion, “Regrets may cost you money”

"Like weather forecasters, economic forecasters must deal with a system that is extraordinarily complex, that is subject to random shocks and about which our data and understanding will always be imperfect. In some ways, predicting the economy is even more difficult than forecasting the weather, because an economy is not made up of molecules whose behavior is subject to the laws of physics, but rather of human beings who are themselves thinking about the future and whose behavior may be influenced by the forecasts that they or others make." – Federal Reserve Chairman Ben Bernancke

Overview

I suggested last week that we might be running in place in terms of market direction. I didn’t realize the clout I have with the markets.

On a week over week basis, the Dow was up 9 points this week, the NASDAQ up 12 and the S&P 500 added 5. With a holiday shortened week coming up and no economic reports of substance scheduled, I won’t be surprised if we get more of the same smoke and little fire.

A lot of people are still looking for some sort of major drop, (euphemistically referred to on Wall Street as a correction), before committing even a small amount of money to the equity markets. It’s important to be aware that sideways movements – as we’re doing now – can also be considered a correction. They could be disappointed by waiting for a downdraft that never really comes and then watching the market train continuing to pick up speed as it pulls out of this recession station.

In order to support the growth of the averages, we do need to increase the volume of shares being traded daily on the various exchanges. Volume is the friend of the bull, so goes the market saying. Our upward move since March has been on relatively light volume – I think due to the continued lack of conviction by many. And now, coming into the summer doldrums, volume is usually slow anyway.

The good news about that is that the markets aren’t getting ahead of themselves either. We don’t have everybody “in the pool” by any stretch. That, together with the gigantic pools of money lying fallow on the sidelines is another reason why the move up is likely to continue.

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.

Americans grow happier as they age and the tendency is holding up even as the economy has performed poorly. Happiness is a complex thing. Past studies have found that happiness is partly inherited, that Republicans are happier than Democrats and that old men tend to be happier than old women. - Pew Research Center survey

Confused by market-related terms? Check out Investorwords.com /glossary

The Chicago Board Options Exchange Volatility Index, (VIX) Wall Street's favorite measure of investor concern, pierced the psychological 30 level Tuesday for the first time in eight months, indicating the perceived need for portfolio insurance is diminishing.

"Its apparent investors believe this market is headed higher at least in the short term, albeit with days that you're going to see the market sell off with a little bit of profit-taking. Every bit of data, every announcement, every piece of guidance both here and overseas is important to assess how the global economy is faring and we're beginning to see the possibility of actual growth. That's what you're looking for - you're looking for traction, you're looking for demand to pick up." - Quincy Krosby, chief investment strategist, The Hartford.

"Investors are tip-toeing back into risky assets. It's classic in what has occurred in the sense that volatility and risk aversion tend to spike over very short time periods and are only repaired over longer time periods." - Lawrence Creatura, equity market strategist and portfolio manager, Federated Clover Capital Advisers.

“33.7 percent of the financial newsletter writers surveyed were bearish, the lowest level of bearishness since January 2008.” - Investors Intelligence

“The demand for commercial lending in small businesses has grown dramatically…I see that as a generally positive sign.” - Jeff Immelt, CEO, General Electric

“Stock markets are just at the beginning of a larger rally which could see the major indexes jump another 20 to 30 percent. We are going to see an earnings rise from 2009 to 2010. We are very much at the early stage of this rally.” - Michael Browne, portfolio manager, Sofaer Global Research

“Prices may rise 2.5% in 2011, a rate well above central bankers’ preferred range. The economy may be at greater risk of inflation than the conventional wisdom indicates.” - Charles Plosser, President, Federal Reserve Bank of Philadelphia

“This rally is absolutely, positively, unquestionably, fundamental; it is not due to some sort of moronic liquidity.” - Paul Schulte, Managing Director, Nomura International

“A market pullback will be smaller than expected as many see this as a buying opportunity.” - Andrew Sullivan, sales trader at MainFirst Securities.

The S&P 500 seems to enjoy the summer most, going up historically an average of 3.7% from Memorial Day to Labor Day. The Dow Jones Industrials average gain is 2.9%. The NASDAQ average gain is 1.8%.

Economic reports from the past week (along with occasional translations…)

New Credit Card Law ~ Key provisions: It takes effect in 9 months. Once it does, credit card companies can’t raise interest rates until a balance is 60 days past due. These increases due to non-payment can be reversed with six consecutive months of on-time payments. The trade-off is that credit will likely be less widely available and will come at a higher price, i.e., fewer rewards programs, higher annual fees, etc.

Federal Reserve comments ~ According to the Wall Street Journal, some of the Fed officials are open to raising the amounts of mortgage and Treasury securities purchase programs beyond the $1.75 trillion that they've already committed to buying.

Additionally, they projected an even deeper recession than they expected three months earlier and a more sluggish recovery over the next two years as labor markets remain under pressure. They expect unemployment to end 2009 between 9.2% and 9.6% and stay above 9% in 2010.
(Some have suggested the Fed is “jawboning” and trying to talk the economy slower. In any case, the unemployment numbers are always the last to turn in a recovery…)

Leading Economic Indicators ~ The Conference Board says its index of leading economic indicators, designed to forecast economic activity in the next three to six months, rose 1 percent last month, better than expected.

State unemployment claims ~ The number of workers filing new claims for state unemployment benefits fell more than expected last week. Due to the auto sector, workers collecting benefits for more than a week rose to record highs.

Michigan's jobless rate was the highest at 12.9%, followed by Oregon at 12%, South Carolina at 11.5%, Rhode Island at 11.1% and California's unemployment rate dropped to 11% last month. Here in Washington, we’re at 9.1%.

Drug company R&D ~ According to the Pharmaceutical Research and Manufacturers of America, drug companies invested an estimated $65.2 billion (worldwide) in R&D last year. Only two out of 10 marketed drugs ever produce revenues that match or exceed R&D costs. Prescription drugs account for just 10¢ out of every dollar spent on health care, according to the Centers for Medicare and Medicaid Services. The two biggest components of spending are hospital care (31%) and physician/clinical care (21%).

Stock market size ~ Since the March 9th low, the total global market capitalization has risen to just over $35 Trillion. The US is, by far, the largest market in the world with an almost 31% share of the total market cap. Japan and China are the next largest markets at 8.7% and 7.6%, respectively. The BRIC countries - Brazil, Russia, India and China - now account for 13.5% of the total market cap, topping the combined 13.4% from the UK, France and Germany. - Bespoke Investment Group

India's elections ~ With 700 million people voting, the Congress Party of Prime Minister Manmohan Singh was unexpectedly given a full mandate to stay on the free-market path that party has been pursuing since 1991.

India's stock market rocketed 17% in the aftermath of the election. The rally was a vote of confidence for an economy that has had 8% to 9% growth almost every year since Singh, who had been finance minister, opened India to investment in 1991. It also showed that even in a downturn, Indians' belief in the future and free markets has been strengthened, not weakened. – Investors Business Daily

Home builders ~ The National Association of Home Builders reported that its housing market index increased for the second month in a row in May, reflecting growing optimism on the part of the 733 residential developers it surveyed nationwide.

According to NAHB chief economist David Crowe, the increase is due to "the best home buying conditions of a lifetime" and that “home prices are at their most affordable in nearly two decades.” He added that, “this continued increase indicates that home builders feel we're at or near the bottom of the market.”

Housing starts ~ It was reported that home building had hit a record low in April - but the reports missed the crux of the story.

The reason housing starts hit the low was that multi-family starts dropped by 46.1%. This is the most volatile segment of the industry. A big downward move this month could become a big jump up next.

Single family starts are up for the second month in a row. Due to the continued excess inventories of homes, the recovery in starts will be gradual at first. Many feel that fewer starts and permits are good things as that will help reduce the housing inventory more quickly.

Canadian oil ~ In 2000, Canada's oil sands produced just 600,000 barrels of oil a day. Today, those sands produce 1.3 million barrels. By 2030, they could be producing as much as 6 million. Probably a good thing to be and remain buddies with the folks up the road…

Effect of high state income taxes ~ Arthur Laffer, working with Richard Vedder of Ohio University, found that from 1998 to 2007, more than 1,100 people moved every day - including Sundays and holidays - from the nine highest income-tax states.

These include California, New Jersey, New York and Ohio. They moved mostly to the nine tax-haven states with no state income tax, including Florida, Nevada, New Hampshire and Texas.

And, no surprise, they found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts. The problem for states that want to pry more money out of the wallets of people is that it never works. People, investment capital and businesses are mobile. They can – and seemingly do - leave tax-unfriendly states and move to tax-friendly states. Why don’t politicians see that?

UK credit rating mess

Standard & Poor's gave the markets a jolt last Thursday when it announced that it had changed its outlook for the UK's credit rating to negative. This is considered to be a formal warning that the Brits must get their national finances in order or lose their AAA credit rating. Not only would that raise their overall cost of governmental borrowing, it would have huge political ramifications as well.

While its AAA outlook was affirmed, there was a 33 percent chance they would get downgraded. The UK now joins Portugal, Spain, Greece and Ireland with negative credit outlooks.
S&P analyst David Beers said that, “we have revised the outlook on the UK to negative due to our view that, even assuming additional fiscal tightening, the net general government debt burden could approach 100 percent of gross domestic product and remain near that level in the medium term." Yipes!

They got into this mess to some extent because the budget the government put out in April combined some very creative borrowing forecasts along with a refusal to say exactly how the growing deficit might be controlled.

The UK Treasury’s own forecasts in the budget conveniently showed debt peaking at 79% of GDP, just under the 80% level that would usually trigger a downgrade – adding to the suspicion that the forecasts were “politically influenced.” But S&P doesn't buy their numbers.
Our market tanked on Thursday as some extrapolated that we were next. Wrong.

First, as noted in the Tea Leaf section, our economy – as represented just by the stock market – is WAY bigger than that of the UK. More important, the dollar is considered a reserve
currency. That means many different governments hold it in large numbers as a portion of their foreign exchange reserves. It’s also the major pricing money for the global markets in most things. In short, it’s the asset of choice in the world.

We also still have a great deal of flexibility with our economy as a whole. We can – and, likely, will – continue to grow as things become more normalized. And that too is a major strength.
Bottom line. Whether the Brits or us are subject to a ratings downgrade is not likely to happen over the next couple years – if then. Things can change for the better too.

GM - again

Speaking of messes. There are so many moving parts to this disaster that it’s very hard to keep up. I’ll attempt to give you some degree of insight into where we are now.

On Friday, GM announced it had borrowed another $4 billion from the US Treasury, taking its total federal funding to $19.4 billion. What began as an emergency batch of loans to GM, Chrysler and GMAC in December, 2008, now looks likely to balloon well beyond $50 billion and could approach $100 billion by the end of the year. I personally don’t know why we do it.

To help GMAC raise additional funds, the FDIC took the rare step Thursday of allowing the junk-rated company to gain access to its debt guarantee program. GMAC will be allowed to issue as much as $7.4 billion in debt, guaranteed by the FDIC in case the company defaults on payment -- marking the second time the government has stepped in to prop up GMAC. The injection is designed to support their balance sheet and allow it to continue making loans for car purchases at GM and Chrysler LLC.

In addition, the Federal Reserve waived rules to give GMAC's new bank, called Ally Bank, more leeway to make loans to GM customers.

According to the Washington Post, the US is preparing to steer GM into bankruptcy, but other sources say they have no plan to do so. General Motors restructuring efforts are likely to go right up to the June 1 deadline set by the administration, but not beyond, a White House economic adviser said Friday.

For perspective, as recently as 1985, GM had 40% of the US market. Today, they have less than half that, only about 19%. How much market share will the “new” GM have? GM's current projections say they will emerge from all of this with an 18% share - after they sell or discontinue their Hummer, Saab, Saturn and Pontiac brands. According to Soleil Research, these four brands only made up 3.8% of the US market. (Looks like GM must be using some of the Brits who came up with their national budget to work their numbers.) Soleil says 16% is a closer estimate for market share.

One thing's for sure, this will be a huge opportunity for Asian car makers - and a few large European makers - to pick up significant US market share over the next few years.

Right now, GM is engaged in negotiating a reorganization that would increase vehicle imports from its plants in Mexico and Asia, while closing factories and cutting the work force in the United States. The UAW doesn’t like that idea. In a letter to each member of Congress, the UAW argued that to qualify for more government assistance, the auto giant should be required “to maintain the maximum number of jobs in the United States.” Never happen.

Why? Even as very friendly this administration seems to be to big labor, even they understand that GM must import a significant percentage of cars from their plants in low-wage countries, like Mexico and China, or low-cost countries, like Japan, to offset fewer imports from Canada and Europe. GM already imports a third of the vehicles that go to showrooms.

What about the current stock and bondholders?

Under the highly unlikely, non-bankruptcy restructuring plan proposed by GM, the government (you and me) would get 50% of the company, the United Auto Workers would get 39%, the unsecured bondholders would get 10% and the equity (stock) holders would get 1%.

To accomplish this goal, GM would increase the number of shares from approximately 600 million to approximately 60 billion, distribute new shares and conduct a reverse split back to 600 million shares.

What that means in American for existing shareholders is that their shares, valued Friday at about $1.40, would theoretically be worth 1.4 cents - each. Whether or not bankruptcy occurs, shareholders are busted. They now have lottery tickets.

For stock holders, bankruptcy court is a not a good place to be because shares typically go to zero once the case is settled. The current shares can continue to trade through the court process. It is, however, remotely possible that GM can avoid bankruptcy over the next few days, and that is why the stock is trading.

The real focus is now on GM bondholders who are being asked to forgive debt in exchange for that 10 percent stake in the “new” company. Representatives of the bondholders have rejected that offer as insufficient – a response I totally agree with. The Feds have, to use the current euphemism, thrown them under the bus…

Perspective

In the overview, I talk about how recoveries can start from these sideways markets. I’ve found some historical market data to help give you additional reason to either start or increase your allocation into stocks.

One important consideration that’s happening right now is that we’re seeing the onset of a potentially meaningful asset reallocation by many large pension plans in the US out of fixed income and into equities. The risk/return tradeoff doesn’t justify a large exposure to bonds in this environment.

A company named Ibbotson, renowned for their charts and graphs of the market and its segments, says the S&P 500 shows historic rallies after historic downturns. The biggest decline - from August 1929 to June 1932 – led to a 163% total return in the 12 months after the June 1932 bottom. More recently, after the June 1970 bottom, the S&P put up a recovery of 42% in the following 12 months.

We’re now up about 30% from our low and, I believe, there’s more to come. Check this out.
According to money managers Navellier & Associates, in the 12 to 21 months following the market bottoms after the previous five recessions, the Dow - on average - gained 55%.

Further, as we’ve seen in the past few weeks, recoveries come fast and with no real advance notice. My close, personal friend – not really - Ken Winans of Winans International says that, in the five years after the bear markets ending in 1974 and 2002, nearly half of stocks' ultimate gains came during the first calendar year after the bottom.

There are still tons of values in this market – be sure you benefit from them.

Conclusion

My comments about not hesitating to get into the markets all come together in a study I came across this week that says, in effect, worrying about regrets may cost you money.

Mr. Bruce Alan Carlin of the Anderson Graduate School of Management at UCLA, along with Mr. David T. Robinson of the Fuqua School of Business at Duke University, has studied how regret affects economic actions in market settings.

These two gentlemen tracked bets made by players at black jack tables without the player’s knowledge. Interestingly – to me anyway – they found that more money was lost by playing too conservatively than too aggressively. Hmmm.

Apparently, this is in line with psychologists' theories about regret. The psychologists say that people tend to act more conservatively if there is a chance they will regret their actions. Here is an example.

Take these two investors. One who loses money because he failed to sell his shares and another who loses money because he sold his shares. Even if the losses are the same, the second investor feels more regret because he took direct action. The other investor can blame forces beyond his control and doesn't have to take direct responsibility, i.e., “the market”.

According to Mr. Carlin, “a lot of older people should have seen the risk of volatility earlier and should have rebalanced their portfolio. But they worried that if they sold and market rebounded they would feel more awful than if market just went down.”

Mr. Carlin also points out the problem may even be more severe in the general population. By definition, black jack players are gamblers. “This is the behavior among risk seekers. Imagine what it looks like among the risk averse,” he said.

Don’t regret – carpe diem!

All my best,

Mike
509-747-3323

PS If you know someone who has suffered the death of a spouse, has been divorced or has changed jobs and has a retirement plan they’re not sure what to do with, please let them know I can be of help. Thank you.

Closing values as of 22 May 2009:
Dow Jones 8277 NASDAQ 1692 S&P500 887 Oil $61.48/bbl Gold $957.00/oz

Market retrospective - 15 May 2009

m.maehl@opus111group.com (Mike Maehl) — Mon, 18 May 2009 15:18:00 +0000

Contents: Overview; Tea leaf readings; Economic reports; Oil trends; Perspective; Conclusion

“I don't believe in circumstances. The people who get on in this world are the people who get up and look for the circumstances they want and, if they can't find them, make them.” – George Bernard Shaw (1856-1950)

Running in place

That’s what we may be doing for a while.

I mentioned last week that I thought the markets were looking tired. The results seemed to bear that out as the S&P 500 was off almost 5%, Friday to Friday. (We’re still up over 30% from March 9.) This coming week has little economic news or earnings reports to get this really jumping again. Until some catalyst comes along to spark things again, we’ll probably just chunk along. The odds are we could very well move somewhat lower near-term as profits from the recent run are taken. For reference, think around the 8,000 level for the Dow Jones Industrials and about the mid-800s for the S&P 500. A drop like that would provide another buying opportunity for those who missed the most recent rally.

This is totally normal.

This is referred to as base building and is typical as investors get a look at the new reality and start assessing how to participate. The longer the markets remain generally higher than we were in March, it’s more likely that the overall economy does better and helps to support the markets.

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.

“Analysts expecting the U.S. economy to rebound in the third and fourth quarter were too optimistic.” - Nouriel Roubini from NYU – “Dr. Doom”

“Some of the measures that have been taken to deal with the crisis seem to be predicated on the belief that this is going to be a short, short recession. Everything says that’s wrong, that this is going to be a sustained period of weakness.” – Paul Krugman, 2008 Nobel Prize for economics.

“The current global crisis is vastly worse than the 1930s.” – Nassim Nicholas Taleb, author of the “Black Swan.”

(These three guys are pretty smart. However, they’ve also been held up by the popular media as the omniscient ones all through the recent market unpleasantness. I don’t know that they would benefit them if the markets get better and nobody wants to call on them anymore…but, that’s just me talking.)

“The bull market is very sustainable. People are still frightened but they should take a look at high dividend paying stocks to inch their way into the markets. This is a once in a generation opportunity to get in at prices that haven’t been as good since 1982.” - Jim O’Shaughnessy, O’Shaughnessy Asset Management.

“The foreclosure crisis may be near its peak. Following a springtime burst of bank repossessions - mainly due to the expiration of government moratoriums – seizures are likely to begin tapering off in the summer. As bank fire sales slow, home prices should stabilize. Assuming that the economy begins to grow in the second half of the year, as many expect, we may be starting to see a leveling off. I believe the real estate recovery is mostly due to market forces. There is little evidence that this is a result of government actions." - Chris Mayer, senior vice dean at Columbia Business School, a chief architect of several Senate housing bills in the last year.

“The Standard & Poor's 500 could hit 1,050 within the next year even as the economy struggles to recover. As the stock market improves, gross domestic product probably will turn positive by the second half of the year, but only modestly as it registers gains of 1 to 2 percent. That incremental movement higher could result in a 15 percent gain for the S&P by mid-2010. The reality is that different sectors of the economy went into recession at different points." - Goldman Sachs analyst, Abby Joseph Cohen.

“This is not a bear market rally but a cyclical bull market. I don’t think it’s too late (to get into the market). We’re about half or 60 percent of the way through the upside. So we’ve still got significant room.” - Barton Biggs, managing partner, Traxis Partners.

“To expect this (market) to continue to move onward and upward from here would be unrealistic. It would be healthy for the market to take a breather and allow some of the fundamentals to catch up,” - Leo Grohowski, chief investment officer, Bank of New York Mellon Wealth Management.

“U.S. stocks could rise 20% and most Asian stock markets could gain 25% by the end of 2009 amid growing signs the global recession may be nearing an end. The global recession is almost over. June would mark an end of the U.S. recession. I know at this point money is flowing to risky assets. Momentum is significantly going to recovery types of trade such as stocks.” – Jan Loeys, head of JP Morgan global asset allocation.

Economic reports from the past week (along with occasional translations…)

Ford 300 million share offering ~ This first offering of common stock by Ford since 1956 was greeted as good news because it shows that the company doesn’t need Fed money and that they’ll be able to use the proceeds to fund their healthcare obligations to the UAW without giving the UAW an equity stake. If the money owed to the union health care trust had been made in stock instead of cash that could have given the union a 24% holding in the company.

US trade deficit ~ The US deficit in international trade of goods and services increased to $27.58 billion from February's revised $26.13 billion, the Commerce Department said Tuesday.
The overall U.S. trade deficit of $27.58 billion was smaller than expected on Wall Street. The trade deficit peaked in 2006 and has since been in a declining trend that will probably not change until 2011. That’s when the stronger dollar of the past year will start having an impact.

US small business survey ~ The National Federation of Independent Business said its monthly index of small business optimism broke a four-month pattern of declines. According to its survey, businesses grew more optimistic last month on the prospects for economic growth and stronger sales. The majority of survey respondents believed that conditions would improve over the next three to six months.

Bloomberg Professional Global Confidence Survey ~ For the first time since it began in 2007, investors are forecasting that the S&P 500 Index will climb this year.

Unemployment claims ~ Initial jobless claims rose slightly last week, primarily due to layoffs caused by Chrysler’s bankruptcy. While overall unemployment numbers will still be going up for a while, the number of initial jobless claims remains well below the peak of mid-March. The recovery in the number of jobless claims usually starts about eight weeks after the peak.

TARP money ~ The insurance companies of Hartford Financial, Prudential Financial, Lincoln National and Principal Financial have each received preliminary approval from the Treasury Department to receive funds from its Troubled Asset Relief Program.

Foreclosure rates ~ Proving the adage that real estate is definitely a locally-driven market, RealtyTrac, a realty company, reported national foreclosure figures for April. The raw numbers said that foreclosure filings of all types hit a record last month, up 32% over the year-earlier number -- putting one in every 374 U.S. households in danger of losing their home.

Not so fast.

Of the – currently - 342,038 nationwide foreclosures, nearly 60% of all the activity is in the four sand states of – in order – Nevada, Florida, California and Arizona. In my market, foreclosures are, maybe, 2%.

Retail sales ~ They declined in April but the drop was concentrated in only two sectors – gas stations and grocery stores. Weakness isn’t likely to persist in those sectors. Excluding those, sales were down only 0.1%. Overall, incomes are up after taxes and after making monthly debt/obligation payments. This will eventually translate into higher consumption. This leads to improving rates of the movement of money through the economy which will give us the legs we need to recover.

Producer Price Index ~ climbed 0.3% in April after declining 1.2% in March. Food prices, on a record jump in egg prices, along with higher prices for vegetables and meat, rose 1.5 percent in April, the biggest increase since January 2008. The increase in producer prices suggests that higher inflation numbers are to come.

Consumer Price Index ~ Compared to a year ago, this dropped by 0.7% in April. It was unchanged, compared with March. Energy and food prices brought consumer prices down by their fastest 12-month rate in over a half century. Still, data continue to suggest the risk of deflation remains very small, since the drops are still mostly centered in energy and energy-related products.

The “core” CPI, excluding food and energy, grew 0.3% in April. That’s the most in nine months and is up at a 2.5% annualized rate in the past three months. Real (inflation-adjusted) average hourly earnings are up 4.3% in the past year, helping support consumer demand even as job losses continue.

Renewable energy ~ (The following is a quote from David MacKay, professor of physics, University of Cambridge, from his book, “Sustainable Energy without the Hot Air.”)

“Let's express energy consumption and energy production using simple personal units, namely kilowatt-hours. One kilowatt-hour (kWh) is the energy used by leaving a 40-watt bulb on for 24 hours. The chemical energy in the food we eat to stay alive amounts to about 3 kWh per day. Taking one hot bath uses about 5 kWh of heat. Driving an average European car 100 kilometers (roughly 62 miles) uses 80 kWh of fuel. With a few of these numbers in mind, we can start to evaluate some of the recommendations that people make about energy. The average American uses 250 kWh per day: 250 light bulbs.

Let's imagine that technology switches and lifestyle changes manage to halve American energy consumption to 125 kWh per day per person. How big would the solar, wind and nuclear facilities need to be to supply this halved consumption? For simplicity, let's imagine getting one-third of the energy supply from each.

To supply 42 kWh per day per person from solar power requires roughly 80 square meters per person of solar panels.

To deliver 42 kWh per day per person from wind for everyone in the United States would require wind farms with a total area roughly equal to the area of California, a 200-fold increase in United States wind power.

To get 42 kWh per day per person from nuclear power would require 525 one-gigawatt nuclear power stations, a roughly five-fold increase over today's levels.

The sober message about wind and solar applies to all renewables: All renewables, much as I love them, deliver only a small power per unit area, so if we want renewable facilities to supply power on a scale at all comparable to our consumption, those facilities must be big.
If you don't want to build 1 million wind turbines, you can drill 1 million geothermal boreholes instead.

Before I close, I would like to say a few words about the idea that ‘the hydrogen economy’ can magically solve our energy problems. The truth is that, in energy terms, today's hydrogen-powered vehicles don't help at all. Most prototype hydrogen-powered vehicles use more energy than the fossil-fuel vehicles they replace. The BMW Hydrogen 7, for example, uses 254 kWh per 100 km, but the average fossil car in Europe uses 80 kWh per 100 km.”

Oil trends

I wrote briefly last week about oil prices. My contention is that the price today just doesn’t seem warranted by the economics. Based on the responses I got, I thought I’d do a bit more research to try and get a better handle on what’s going on.

Crude oil for June delivery on the New York Mercantile Exchange fell as much as 3.2 percent to $56.78 a barrel during the week as perceptions that the 10 percent rally of a week ago won’t last.

According to oil trader Daniel Cronin, senior commodities analyst at PitGuru, "unless we have a real rip-roaring equity market, I really don't see crude higher than $60. I don't see any kind of fundamental reason for it other than speculation like we saw last year. That's not the same game anymore." He’s definitely right about that.

Since February, crude prices have moved to the current levels, in spite of reduced demand. World oil demand will fall by 2.56 million barrels per day in 2009, the sharpest annual decline since 1981, the International Energy Agency said this week.

Commercial storage areas are overflowing, having increased in the first quarter, a period when they usually drop. Moreover, as oil prices have risen, OPEC's production discipline has started breaking down. OPEC actually increased output last month for the first time since August.
Even the folks at OPEC say that, “prices have remained above $50 per barrel due more to market sentiment than fundamentals. Considerable risks (downward) remain as oil market fundamentals are far from balanced due to the persistent contraction in demand and growing supply overhang."

OPEC also said in a monthly report that a rise in oil prices, which topped $60 a barrel for the first time in six months this week, was “due to sentiment rather than supply and demand fundamentals.”

Oil is really floating on cheap money. Investors in oil funds push up futures prices, making it profitable for others to store crude and sell it forward to be sold at, presumably, higher prices; another reason inventories are high.

Over time, supply and demand do set the oil prices. That's why it has little, to negative, correlation with equity markets over the long term. So far this quarter, however, correlation between the moves in the S&P 500 and crude-oil prices has leapt to 70%.

Bottom line. Unless the markets really rally strongly higher, I don’t see any continued upward move in the price. However, with money as cheap as it is, I can’t see it dropping significantly either.

Perspective

The way the media chooses to look at the markets has been a source of wonder to me ever since I started, back when the Wall Street Journal was hand written on papyrus. These past six months have proven to be no different.

I can assure you that this is not the worst economic crisis since the Great Depression. Let’s just go back to the 1980s and 1990s. The facts were then that agricultural loans, oil loans and lending to Latin America all went bad at once. To help combat inflation, Paul Volcker – chair of the Federal Reserve at the time - pushed short-term interest rates well above long-term rates, giving us what’s called n inverted yield curve. Very much unlike today, banks and savings and loans were paying more for deposits than they were earning on loans.

Eventually, between 1980 and 1995, more than 3,000 financial institutions went bankrupt. They did not destroy the economy. The government gave banks time to work out their bad loans. Meanwhile, the Reagan tax cuts got the economy going, eventually growing its way out of the worst of it. The Resolution Trust Corporation (RTC) was put into place in the late 80s to clean up the banks that just could not dig themselves out.

I have no reason to believe that capitalism is broken. It is still the best, self-correcting economic system. Allowing the market system to deal with the problems of the last few years would have been much better than having the government do it. The recent market movements are reflecting the fact that the capitalistic system is working its way into normalcy.

Conclusion

A number of experts are saying that bonds are still the place to be, using the past 40 years of performance by large company stocks (i.e., S&P 500) as proof of that theory. Over the past 10 years, that’s certainly true – if all you invested in was that Index. More to the point, using rear view mirrors is not how to invest for the future. Well, like Paul Harvey used to say, now, for the rest of the story.

Bonds are great for those chunks of money you must have available in a short period of time – say, three years or less. After that, they should only be a part of your asset allocation plan – not your main investment. Here’s why. There has never even been a 20-year period when real returns in stocks have been negative. In fact, the worst 30 year real return (after inflation and axes) for stocks is 2.6% per year, just slightly below the average real return investors earn with government bonds.

If you look at today's markets and going forward, the outlook for government bonds – and most bonds, in general - is not very good. Yields on 30-year TIPS (inflation-protected bonds) are 2.3%. Yields are only about 4 percent for a Treasury bond coming due in 30 years.

By comparison, in a time when stocks have fallen 50 percent from their previous high - as they had in March of this year - their subsequent 30 year real returns have always averaged 10% per year. In contrast – something the bond gurus seem to “overlook” - for the 40 year period from 1941 through 1981, government bond investors lost a whopping 62 percent of their value, after inflation and taxes. A loss in purchasing power over this long a period has never happened in stocks.

I believe outperformance of government bonds over large stocks has ended. Since the March 8 lows, stocks have rallied 30 percent, while government bonds prices have fallen sharply. As interest rates rise – both in response to a better economy and the impact of huge government spending – the bond prices will continue to drop.

It requires patience to stay with the stock market when things are rocky. It also requires a contrarian view and the strength of your convictions. For sure, it often also requires you to totally ignore the business media's sound bites. While they say that their intentions are honorable, with very few exceptions, they have no or little skin in the game. And it often requires you to ignore the delivery of the talking heads whose platform is the media and who are very general in their "advice".

Stay with your plan, based on your values, goals, desires and needs. Don’t let someone who doesn’t even know you prevent you from doing what’s best for you…

All my best,

Mike
509-747-3323

PS If you’d like to get together over coffee for a review of your current investment approach or have questions on any aspect of investing, please call this number or simply reply to this email.

Thank you.

Closing values as of 15 May 2009:
Dow Jones 8268 NASDAQ 1680 S&P500 882 Oil $56.47/bbl Gold $931.00/oz