The stock market has been going up in recent months although August is threatening to be the first losing month since March.
So what gives? What is going on? And finally, what do we expect in the future? We can assure you of one thing: what has happened is not normal unless the Great Depression is anyone's definition of normal!
The financial markets generally look for signs of future economic activity and base trading decisions accordingly. That means that when the market started to rise, the expectation was for the recession to end in September.
Has anyone seen a recovery yet? If so, we need to know since we are not able to see it. The tall yellow weeds are so high that the "green shoots" are obscured. Nonetheless, we have to be able to analyze what has happened and assess how to navigate in the future.
The signs we see are not very pretty. Unemployment is still skyrocketing but the market is excited because we are creating about 575,000 broke and discouraged workers each week rather than the 600,000 for most of the year. There was an unexpected jump this week but that encouraged the market as well? What we fail to remember is our economy needs to create 150,000 new jobs (almost 2 million a year) each and every month just to absorb new workers coming into the work force. That still leaves us 700,000 short each month.
Our economy is made up of consumer spending. In fact, a full 70% of our GDP is the consumer. During the heady days of 2001-2007, the consumer consumed their homes and credit cards. They took the bait. When banks tossed out almost free and practically zero interest loans, many of us bit. We reasoned that the real estate market had nowhere to go but up, our jobs were secure and happy days were here again. If any of our readers have ever been saddled with high debts or credit card problems like we have then you know that things don't resolve themselves overnight.
We are going to see a "de-leveraging" process for some time and perhaps years. De-leveraging is when consumers stop borrowing and reduce their debt load. This has happened. For the past five months, consumer borrowing has decreased. Add this to the savings rate climbing from -0.2% to 6.9% and it becomes very clear that people are not excited about getting over their heads again.
The "Cash for Clunkers" bill is designed to spur spending and bury the consumer. After all, who can resist a "good deal" at the car lot! Unfortunately, the people buying are going to have to postpone other purchases and grapple with more debt than they probably are comfortable with. Most people reason that they can cut somewhere else to absorb a car loan but our experience shows that people rarely buy cars when they can truly afford it. Ditto for homes!
This past year 58 million credit card holders have had their credit lines cut. Our guess is most of our clients have received such a notice. That impacts one's ability to be nimble and navigate the rough terrain of the recession. With credit lines cut, that makes it hard to cope with the inevitable emergencies that are to be expected and jeopardizes their ability to service home loan debts.
But wait, there is more. A full 13% of home mortgages are in default or are in foreclosure. What a tragic number. Almost 1 in 7 homeowners are in deep, deep horse pucky and really have not a hope or a prayer of catching up short of a major miracle. The sub prime loans have stabilized at 25% default while the prime loans (for only the most stable and credit worthy borrowers) are escalating fast. In looking at the foreclosures in our area, the past few weeks have been more extreme than we have seen.
There was some interesting news this week. It turns out that corporate insiders are selling at a break neck pace this month. Since April, insider selling has been on the rise. An insider is considered the upper management of big public corporations who are privy to the inner workings of their firms as it relates to the economy at large. In other words, they know the truth and are obviously very worried about their own net worth plunging. The selling relative to buying soared to a five year high with a 33:1 margin.
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There is some good news. Home sales are up, oil prices are up, the dollar is weaker and retail sales are down. The good news about all of these is they are believed to have changed by more than expected. As long as the economy is not collapsing then all news is good. By the way, a weaker dollar and higher oil prices are bad for us consumers but the market loves it. That makes exports more profitable. And higher gas prices mean the recession is ending. After all, why should any of us care if gasoline is going up if the recession is over? Why should we lose sleep over our dollar buying less and less if it helps the exporters deal with the recession?
Pray understand our drift here. Things are downright ugly out there. The only truly good news is our President, our Treasury Secretary and our Federal Reserve Board chief have told us that things are improving. In fact, Ben Bernanke said we are on the cusp of a recovery. We believe him as long as a cusp is wide like the Grand Canyon. If you believe this then you may want to consider having us change your portfolios to an all stock affair. Otherwise, we suggest that you remain skeptical like we are.
This pattern has never been seen except in the 1930's. During that time, President Hoover and his minions were proclaiming joy and exuberance every step of the way. The markets roared up 50% in six months only to falter. There were five or six (depending on how you calculate it) strong rallies during the Great Depression; all of them led by hype, smoke, mirrors, conjecture and hot air. There was never, ever any solid economic reason for any of the rallies. We contend that the same exists today. There is not one shred of evidence that things are getting better. True, they are not getting worse but we need growth to sustain our economy and not simply a status quo of "not worse."
The only place things are getting better is on Wall Street, in the banks (although reckoning day is around the corner), the auto makers and the health care industry. There is glee in the White House as well since the market is up on their glowing reports. In everyday America, people are suffering.
So where are we right now? Our portfolios for the past month have been mostly in bonds. Two of our four strategies are 100% bonds and fixed income. The other two are 60% and 70% in bonds and fixed income. We have had a decent month and are pleased since it looks like reality is setting in and the markets are moving as we expected. The only difference is we expected the market to listen to us several months ago but apparently they just started reading our letters! We know the White House is getting our newsletters; we just hope they are reading them.
Basically, we are just waiting for Wall Street to come to their senses. In other words, we are doing what sends cold chills up the spine of every investor: we have to be patient!
Yikes, patience you say? We can't do that. We could lose money. We could go broke just waiting. Unfortunately, that is the nature of the financial markets. Always has been; always will be. We are not used to such discipline. We recently looked at a chart of the average holding period of stocks. During the good years of the 1960's to the 1990's, the average holding period for stocks was around 5-6 years with a high of as long as 7 years. Now the average is well south of 1 year and the only time that happened before now was in the Roaring 20's! Today, instant gratification simply is not fast enough.
Several weeks ago, we sent out an email about the 3 Boxes of Money. I encourage everyone to really study this. By having a logical, rational, methodical and disciplined strategy of positioning money, you can side step the anxiety that plagues most investors. Our new Fixed Income Strategy is designed to lend stability for the shorter goals of 1-5 years while our other three Dynamic Allocation Strategies are designed for 5+ year goals. If goals are more than three to five years away, why would anyone care what their portfolio does in the meantime as long as it is positioned in a strategic manner? Patience is the only investing secret that always works and impatience is the number one killer of any family's nest egg.
September is historically a losing month so it should be very exciting. The fall months are also exciting and we will see if the rally has legs or runs out of steam. If it still has legs then we can be nimble and participate but if gas is running out, we can sidestep the carnage just like we did last year. Eventually the market will start to react logically based on the situation of every day Americans and that is the time that we do the best.
As we reported last time, if you need more information about our new Fixed Income Strategy please email or call for an appointment.
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