A Look at the Coming Week - January 12, 2009
We hope that all of you had a very
special holiday season! Here at Vance Capital Management we are gearing up for
one of our busiest years ever. The financial markets are still quite volatile
so we will have our hands full this year. Thanks to all of you for all your
referrals this past year. We will continue to work hard to outperform (we
hope!) the financial markets. With all of you helping us get new clients we can
concentrate on money management and not on marketing which usually accounts for
about 50% of any financial advisors day.
Many people are counting on
President Elect Obama's inauguration to help the markets rally for a while.
From what we see that is not happening right now. In spite of repeated press
conferences announcing cabinet members and advisors and repeated assurances
that he will create 2 million jobs (the number goes up each day and is now 4
million jobs!), the markets have not responded favorably. Hype goes only so far
before the reality of a sinking economy sinks in.
Take a look at the chart below. This
shows how the stock market has performed during the average year after an
election. Since the beginning of the chart which is 1900, the market tends to
underperform in January and February but tends to outperform in late March to
late May.
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The employment data was not so good
this time. We are losing jobs with over 11 million Americans out of work. The
official number of unemployed is 7.2%. Those economists who produce statistics
using the methodology from the Clinton
years show very different numbers. Our favorite is John Williams of Shadow
Government Statistics. He says that the total of unemployed workers is an
astounding 17.5%. The next time someone says that this is not like the Great
Depression where 25% of Americans were unemployed, you can point out that the
real numbers are getting very close.
Consumers are finally slowing down
on borrowing. The slowdown in borrowing is the biggest since the Fed started
tracking it in 1943. Even still, the total of U.S. consumer debt outstanding is
the highest of any society at any time in history. We owe over $2.5 trillion
plus about $12 trillion for mortgages or just about $15 trillion. Not including
mortgages puts the percentage at about 18% of annual GDP, a truly frightening
number.
The Obama administration is aiming
to stop this horrible recession causing behavior. The new stimulus package of
whatever trillions it turns out to be is targeted at those consumers who are
slowing down borrowing, paying off debts and saving money. These people must be
stopped if we are to save our economy! OK, seriously now. Yes, the new
administration is trying to stimulate spending and erase savings. But that is
only because an increase in savings (has gone from 0% to 3% in recent months)
is recessionary. Since Americans are saving and cutting back, it is hard to
really figure out how they can be effective short of adding more trillions of
debt.
Oil is continuing to drop
precipitously. Our cars love it but in reality it is a very dangerous
situation. Many of the countries that are resource based are in serious
trouble. Those countries include Russia,
Australia, Venezuela, Canada,
Mexico
and others. If other countries cannot finance their own countries they may have
to sell off their U.S.
treasury bonds. They financed our profligate spending and have been very gentle
with us by not squawking. China
is the most likely to sell bonds which could wreak havoc on interest rates. If
you have an opportunity to re-finance debt at lower rates, do it now.
There will be a slew of economic
reports this week. More important is the slew of corporate earnings reports.
Today starts earnings season with Alcoa kicking off at the close of the market
today. This week will set the tone for the next few weeks.
Retail Sales (Wed): Retail sales are expected to drop 1.2%. We
find this weird. Does that mean that everyone who spent $100 last year on
Christmas really only spent $98.80 this year? That is so hard to believe which
is why government numbers are so difficult to trust. A better guide is look at
the chart below. By looking at the yearly changes you can see that consumer
consumption is slowing at an alarming rate. Maybe that $500 check you will get
can reverse it, huh? You can be sure that this will be watched closely by the
stimulus team whose job is to reverse this and get spending to spike once more.
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Producer Price Index (PPI)
(Thurs): This represents the inflation
rate for businesses. The consensus expects a drop of 2.0% from the previous
month. This number is scary as it does show us that deflation is becoming a
reality. If businesses are seeing costs drop, should we not expect the same in
our prices? This will put pressure on businesses to lower prices to consumers
which is deflationary and is a precursor to a depression. This chart is much
like the one above and is precipitous and swift in its decline. In good years,
this would be a welcome event but now it is not. The government is hoping that
they can re-inflate the economy and reverse the numbers to more normal data
points.
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That does it for another week.
Thanks for reading the Vance Advance!
Working for your wealth and peace of mind,
The Vance Capital Management Team | |
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