The financial markets sure have a mind of their own! Professional money managers are still scratching their heads wondering what has happened and what the future holds. Both questions are difficult to answer which leads us to believe that this is not the real deal. When the real deal comes our way (which it will at some point) there is more correlation between the economy, corporate earnings and the actual prices of stocks. For now, we can only react to the cards being dealt.
We have not seen a shred of evidence to suggest that the recession is over. We don't think our Fed chief, Ben Bernanke has any evidence (we all see the same data) but he continues to tell us that the worst is over. That is probably true since it is hard to imagine a return to one year ago when Lehman Brothers fell, AIG went toes up and Fannie Mae and Freddie Mac went comatose on their way to ICU. Still, we find it odd that the truth is nowhere to be found.
So what is the truth? There is more confidence by investors that what we have experienced is behind us. No argument there. There is a feeling that risk is coming back to the market. As far as banks are concerned, it never left. They are taking huge risks, did not learn their lessons and are still in danger of being bailed out by taxpayers.
There are also many who believe that a new bull market has started. This is patently false on all counts. We are in a long term bear market and have been since 2000. Our analysis shows it will be 5 to 10 years before the next bull market phase although we will have rallies from time-to-time. That means we will have drops as well. Most folks who are calling for a new bull market are basing their conclusions on past recessions. This is a consumer recession and has never been experienced so past events are no longer valid.
So, what are we in? We believe that since we are tracking the Great Depression quite closely that this has just been a bear market rally and is about the same magnitude as the 1930's. For the rally to continue, the companies that make up the stock exchanges need to get healthy. For the past year, they have been shedding employees at a record pace, cut spending in an unprecedented fashion and reduced inventories. This has led to some profitability but certainly not enough to justify the current prices.
We believe that the behavior of consumers is changing. No longer are people looking for wealth, glamor, fame and fortune. Rather, people are tired of the debts that they racked up seeking the elusive riches. We are seeing a move from opulence to sensibility, from extravagance to practical and from profligate spending to thriftiness. A new report came out today that shows about 31% of people earning more than $100,000 a year are living paycheck to paycheck! And this is up from 20% last year. Clearly, people do not have a handle on reality. If almost one third of Americans are struggling to make ends meet on $100,000 a year, something is really, really wrong.
Ultimately what happens is they are forced to pay down debts and save more. This in turn slows down lending and shrinks the economy. When those folks wake up and realize that the fancy cars, the big McMansions and the designer clothes simply were not worth it then they will return to fiscal responsibility. The problem is America was built in the past ten years on a foundation of fiscal irresponsibility! That in turn has created a worldwide expansion designed to keep up with our spending.
What the stock market, economists and politicos do not realize is buyers are on strike purely out of necessity. And they are not coming back for some time. As time passes, corporations will be faced with leaner years and anemic earnings which will lead to a wake up call for the stock market. We expect to see this occur in the next few quarters as the recession lingers. Analysts drafted such grim expectations after last year that once some companies exceeded those expectations, the markets took off. More than likely we are not going to see those companies grow much in the next year which will lead to some market disappointment.
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The real driver of the markets has been the U.S. dollar. The dollar is very weak and is getting weaker. This has driven the stock market higher and commodity prices higher. When the dollar is weaker, it leads to inflationary pressure which drives up commodity prices and sometimes stock prices. We are now seeing a direct correlation which is creepy since the stock market should be driven by earnings and fundamentals. This also leading to a rise in gold but that is to be expected. A weak dollar is highly inflationary and gold is inflation protection.
A big concern of ours is the direction we are taking with global trade. President Obama just slapped China with a 35% tariff on tires. This is threatening to touch off some serious trade wars which would not be good for anyone. One of the reasons the Great Depression lasted so long (so the experts say) is because global trade slowed as countries became more inward and protectionist oriented. Global trade is what has grown the global economy the past ten years. Stop this and we will stop all progress. The Chinese are upset and angry and are looking to retaliate. We are not quite sure what leverage we have when they are our biggest creditor. One can only guess that our president and advisors are following the old saw: If you owe the bank $100,000, you have a problem; if you owe the bank $1,000,000, THEY have a problem! Sounds like China is the one with the problem.
We have had some calls from clients wondering if they should jump into the stock market. Most folks do not understand the risk inherent in markets. A rising market does not mean risk is gone or faded. Currently, we believe that the risk is increasing on a daily basis. The global political risks, the global economic risks and the change in consumer behavior are just too much to ignore and must be reckoned with.
So what do we do now? We believe that patience is the key right now. That is hard to do but it is the only prudent course of action. We also believe that risk is high and needs to be treated with kid gloves. It was not long ago that the Dow Jones dropped 1000 points in a day and there is nothing to suggest that it won't happen again. We are still hedging most our portfolios.
Because of the weak dollar, the equity and commodity markets have been climbing again. Until things level off, we are participating in the stock market but keeping some hedges to protect against sudden drops. It is hard to make money without taking enormous risks so we are being cautious and wary.
Our Conservative Strategy is all bonds at this time. There is 10% cash, 20% high yield bonds, 10% corporate bonds, 30% in long term government bonds, 20% in short term government bonds and 10% in inflation protected government bonds. This portfolio is up 0.28% for September.
Our Moderate Strategy is hedged with 30% being our hedges which go up when the market goes down and they go down when the market goes up. This is to protect against a sudden shock of some kind. We have 5% in high yield bonds, 3% in Brazil, 3% in silver, 10% in long term government bonds, 5% in gold mining stocks, 3% in agriculture, 3% in precious metals, 10% in the Nasdaq, 5% in the S&P 500, 3% in natural gas and 20% in short term bonds. This portfolio is down 0.61% for September.
Our Aggressive Strategy is hedged as well with 40% to protect us in a down market. The remainder of the account is as follows: 10% in high yield bonds, 5% in Brazil, 5% in silver, 10% in long term government bonds, 5% in gold mining stocks, 5% in natural gas and 40% in Nasdaq. This portfolio is down 0.59% for September.
The Fixed Income Strategy continues to shine! We have not made any changes since we started it on August 1, 2009. There are sixteen positions and this portfolio is up 1.42% for the month of September. (Source: TCA accounts #314847, 306687, 306703, 306705, dates 09/01/09 to 09/15/09)
The next few months should be very interesting. September is historically the weakest month of the year while October tends to have the most violent drops. Our fate hangs in the balances of the U.S. dollar, trade relations with other countries and the ability of the consumer to prop up the economy. We will stay cautiously optimistic and maintain our ability to weather any sharp or sudden drops which will limit our returns but will also limit our losses.
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