Tuesday, October 25, 2011

A Perspective on Global Risk Factors

1 - Another slight gain in the stock market last week has done little to improve the general feeling of unease regarding both the global economy and the financial markets. There are so many unsettling factors at work that it's difficult to be optimistic, at least for the near term. But it's important to remember that it is during just such times that the stock market historically has had some of its most impressive rallies.

2 - To get a perspective on one of those global risk factors -- the situation in Europe -- I invite you to view the brief video by visiting Millard & Company Home Page (if you can get past the sight of my currently stitched-up face). Below is this week's economic news, is an article describing some of the concerns surrounding the domestic stock market:

Has Wall Street Learned From 2008?

Some market bears think very little has changed. They could be right.

Memories of 2008 are still fresh: The credit crisis; the collapse of Lehman Brothers and Washington Mutual; the federal takeover of Fannie and Freddie; the market downturn. There's little doubt Wall Street would like to erase it all from its conscience, and maybe it has.

Part of the anger of the Occupy Wall Street movement comes from the perception that nothing has changed. While the Dodd-Frank Act (designed to make the financial system more accountable and transparent) is now taking effect, the Volcker Rule (intended to stop banks from trading for their own accounts) may be watered down or put off. Beyond that, the U.S. economic recovery from the Great Recession has sputtered and made people question the recent bullish sentiment.

Stocks have rebounded strongly since 2009, but there are still many factors to worry about; this may lead to a little contrarian thinking.

This bull market may be a diversion from a longer term bear market. For most of 2011, the S&P 500 has been above 1,200 (a great rebound from the March 2009 low of 676). What was behind that? The short answer: a weak dollar. We haven't exactly had a boom economy in that timeframe.1,2

Some analysts look at Wall Street right now and see a rerun of the 1970s, when you had momentous rallies masking a bear market that went from 1967-82. In addition, researchers at the Federal Reserve Bank of San Francisco are concerned about the possibility of a generational sell off; a potential market "headwind" for 10 or 20 years stemming from greying Baby Boomers getting out of stocks as they get closer to retirement, countered only partly by overseas investment.3,4

What has changed on Wall Street since 2008? Perhaps not much. The general perception that the CEOs of the big investment banks and mortgage companies whose thoughtlessness contributed to the Great Recession met with no real consequence seems to be taking hold, as evidenced by the Occupy Wall Street movement.

By the way, remember the furor directed at risky derivatives trading? In September 2011, the Comptroller of the Currency had recorded an 11% year-over-year increase in derivatives investment in the banking industry. Banks now hold almost $250 trillion of the contracts.5

A truly severe punishment of Wall Street would come at a dear price for Washington. Some of the biggest names from Wall Street (and the real estate sector) have also been major lobbyists and campaign contributors. According to the nonpartisan Center for Responsive Politics, the National Association of Realtors has contributed more than $40 million to federal-level political campaigns since 1989; Goldman Sachs has contributed almost $36 million since then, and Citigroup nearly $29 million. The financial, insurance and real estate industries have collectively spent over $4.6 billion in lobbying efforts since 1998.6,7

What is happening with the recovery? Not much. Whileunemployment is above 9%, underemployment is the real story - in September, 16.5% of Americans worked less than 40 hours a week. No wonder homes sit on the market and consumer spending increases mostly in response to rising food and energy prices. Wages even retreated 0.2% in September and incomes fell 0.1% - the first monthly decrease in income since October 2009. Assorted 2012 forecasts see slow or slowing growth in various European and Asian nations.8,9

Is there a bright side for Wall Street? Actually, there could be. The European Union is making decisive moves to address its debt crisis. Indicators still show that our economy is growing, not contracting; September was the best month for U.S. retail sales since March. Many analysts think that the Dodd-Frank regulations will discernibly impact the Wall Street mindset. Lastly, the strength and duration of seemingly every major bull market has been questioned by the bears; history might record that a secular bull market began in 2009, after all.10

Only time will tell. Over the years, the stock market has faced some great challenges - and risen to meet them again and again. This time around, the hope is that Wall Street's behavior (and behavioral assumptions) won't sabotage the rally.

3 - Please note in the "Upcoming Events" that we have two new events on the schedule. The first is a special client dinner-and-a- movie night scheduled for Thursday, December 1, when we will watch the great holiday classic It's a Wonderful Life. (You can sign up for this celebration by clicking here.) The second is the rescheduled panel discussion on New Realities: The Global Economy, which will take place in mid-January.

4 - One week from today is Tryon's annual Halloween Stroll beginning at 4:00pm. Most of the downtown businesses close early in order to host hundreds of costumed children and their parents during the annual trick-or-treat ritual. I am privileged to again emcee the costume contest, which is always a hoot (6:00 in the Tryon Movie Theater). If you'd like to have some fun and help Juliet and me distribute candy at any time between 4:00 and 6:00, feel free to stop by the Depot. (We're racking our brains to come up with semi-healthy treats to give away; if you have any suggestions, let us know soon!)

Enjoy this beautiful fall week!


Tuesday, October 18, 2011

A Way To Re-Set Your Perspective

1 - The stock market (or at least the Dow and NASDAQ) recovered enough last week to put it back in positive territory for the year. We have some tricky ground to cover between now and year-end, so we shouldn't start counting chickens just yet.

2 - Speaking of the stock market, you may notice that the 10-year total return average of the S&P 500 is only 1.23%. That's what pundits are talking about when they bemoan the "lost decade." Ten years is a long time to go with measly returns. That is why we're always seeking sources of investment returns not tied to stocks. In keeping with that quest, we are adding another asset class: Market Neutral Strategies. Although the name may be unfamiliar to you, it is a strategy I have employed successfully for over a decade. I was under the impression that it had become unavailable, but it turns out we can still access it, so it will be showing up in client portfolios over the next few reporting cycles.

3 - While there are quite a few economists who believe we may be headed for a second recession, the data doesn't completely support that assertion. Read the article below for a few bits of good news.

Double-Dip Recession? Don't Be Too Sure.

Key indicators point to an economy (slowly) on the mend.

This year, assorted economists and journalists have contended that the U.S. is on the edge of a new recession. Yet recent indicators hint that the economy is doing a bit better than some analysts think.

U.S. retail sales were up 1.1% in September. This is the kind of monthly number that you might expect during a typical recession recovery, and it surpassed the +0.7% consensus forecast of economists polled by Bloomberg News. Additionally, the Commerce Department revised August retail spending (formerly flat) to +0.3%. The year-over-year numbers in the September report really impress: we see annual gains of 7.9% for overall retail sales, 10.1% for online retailers, 6.9% for the restaurant and nightlife component, 7.6% for clothing shops and 6.5% for home and garden stores.1,2,3

As Credit Suisse economist Jonathan Basile told CNBC.com, "The fear of recession recedes when you see a retail sales report like this." Basile said he was revising Credit Suisse's 3Q 2011 GDP forecast for the U.S. north from +2.5% to +2.9%.4

GDP did improve in the second quarter. Real GDP was +0.4% in the first quarter of 2011, but the third and final real GDP estimate for the second quarter from the Bureau of Economic Analysis was +1.3%.5

"As of today, the recovery is still underway," Berkshire Hathaway CEO Warren Buffett commented at an October 4 Fortune Magazine conference. "Our railroad carried 200,000 carloads last week," he said, referring to the Burlington Northern Santa Fe company. "That's the highest total in three years. And that's stuff moving around the country, supplying merchants and doing all kinds of things."6

Other signs of growth & stability can be seen. Here in October 2011, many corporations appear to be in better shape: U.S. non-financial firms have $15 trillion of potentially liquid cash or investments on hand compared to $13.7 trillion a year ago. American residential investment spending is up by $9 billion since a low-water mark last spring; existing home sales rose 7.7% in August and the backlog of homes for sale fell to an 8.5-month supply from the previous 9.5-month inventory. The Institute for Supply Management's twin purchasing manager indexes still show ongoing sector expansion; the service sector has grown for 22 months.7,8,9

The continued vitality in consumer spending and other encouraging factors points to a recovery. It may seem unimpressive or frustrating, but it doesn't indicate a recession. 

Have a wondrous week!

~ Andy

My wife Sharon and I recently visited Yosemite, Kings Canyon and Sequoia National Parks in California where we took these photos. Such timeless majesty tends to place the moment's financial news in its proper perspective.  
One of the many breathtaking vistas in Yosemite Valley.

A Giant Sequoia, 30 feet wide, as tall as a 14-story building
and over 3,000 years old.

A sliver of the 360-degree view from Moro Rock.