Cliff Walk

December 3, 2012

12.03.12

All we hear about these days is the fiscal cliff, which we’re heading for come January 2013.  We read about Obama’s “offer” of $1.6 trillion in tax increases and choke, or we learn that the Republicans want the Democrats to start “acting like adults” and we cringe.  One reason for concern is the estimate that going over the fiscal cliff will reduce economic activity by 1 ½ percent. This on top of an already sluggish economy.

But what would happen if Congress fails to act in time? One prediction is that the 2013 democrats would push through a tax cut for all but the $250,000+ income group.  Additionally, the spending cuts outlined in the fiscal cliff will not hit all at once, mitigating their impact in the early months.

If it makes you feel any better about taxes, the 2010 tax rates are lower than any year in the 1980s.

Also if you look around the world we find that U.S. taxes as a percent of GDP are near the bottom.  Keep in mind the ingenuity of Americans to find ways to reduce their taxes through deductions and loopholes.  Next year is the 100 year anniversary of the federal income tax system.  We can also celebrate 100 years of finding ways to keep our taxes down.

Let the battle begin!!

“Those who are too smart to engage in politics are punished by being governed by those who are dumber.”
– Plato

Area of Agreement

November 26, 2012

11.26.12

Last week was a good week for equities with major U.S. market indexes posting their best weekly gains in 5 months. The gains were driven by Chinese manufacturing data which was positive in November for the first time in 13 months and strong business sentiment readings in Europe. The DJIA gained 3.3% for the week and the S&P 500 posted a 3.6% weekly gain.

This week look for reports on durable goods orders, new home sales and a revision to third quarter GDP numbers. While durable goods and new home sales may be slightly lower in the 3rd quarter, GDP will probably be revised up to 2.8% from the initial reading of 2%. We look for continued volatility in the markets as news of progress or lack thereof on the “fiscal cliff” will continue to drive investor concerns.

At this point almost all S&P 500 companies have reported 3rd quarter earnings. At the beginning of October forecasts were looking for a 2% decline but now the quarter may show a minor increase. However, revenues were weaker than expected with 61% of companies reporting revenues less than expected and the first decline since 2009. As a result GDP estimates for the 4th quarter are now 1.8%.

“The democracy will cease to exist when you take away from those who are willing to work and give to those who would not.”
– Thomas Jefferson

Giving Thanks part two

November 19, 2012

11.19.12

Last week was another negative week for the equity markets with the S&P 500 down 1.36%. Markets have been in a correction since the S&P 500 hit 1465 in September. However, 5.3% of the decline occurred in the 7 trading days since the election. Below is an interesting chart of the S&P 500 illustrating the similarity of the correction we saw in May to the current market sell-off.  Readers of our recent quarterly newsletter were informed of our expectation of such an event occurring.

This week last year we wrote about “Giving Thanks” but not for the uncertainties we were facing at the time. Take a quick read and see how little has changed regarding politics and economics yet the S&P 500 is up over 13% since this posting.

Markets are in rally mode today as fiscal-cliff fear fades. However, we would not be surprised to see volatility remain elevated until there is more certainty out of Washington.

Coming together is a beginning; keeping together is progress; working together is success.
– Henry Ford

Post Election Conundrum

November 13, 2012

11.13.12

The “Fiscal Cliff” versus the increasingly precarious Federal Balance sheet

The election is over, and most of the players remain the same. The expectation that President Obama would be a one termer [like Carter] because of the subpar recovery was shattered. It seems that the better Obama comparison is with FDR.

The market advanced early in the week as the possibility of a Romney win seemed to increase. That hope was shattered by midnight on Tuesday, setting the stage for a 2.4% weekly market slide.

The post-election domestic economic headlines are incessantly chanting “fiscal cliff” [a subject which we first discussed last May 29th]. This cliff is an artificial Armageddon that was created by politicians and will be “solved” by them at the last minute. At its core, the debate is about the size of the federal government, as measured by its spending.

As the following table shows, tax receipts are within 5% of the prerecession level.

However, spending is ~30% higher than 2007 level, and the deficit as a percent of GDP, although declining modestly, is at an unsustainable level. And don’t forget, the accumulated explicit deficit has grown from $11T to $16T in the last four years [now at 100% of our GDP!].

Let’s hope that our Washington leaders come to a resolution that does not kill the goose that has been laying all the” golden eggs” over the last ~236 years.

“The only limit to our realization of tomorrow will be our doubts of today.”
-Franklin D. Roosevelt

Hurricane Sandy & Everything Else

November 5, 2012

11.05.12

Our thoughts and prayers go out to everyone impacted by the devastating effects of Hurricane Sandy.  Sandy was yet another reminder that each day is a gift.

Last week was a shortened trading week due to disruptions from Hurricane Sandy.  For the week, markets were basically unchanged with The Dow Jones Industrial Average closing at 13,093 (down 0.11% for the week) and the S&P 500 closing at 1,414 (up 0.16% for the week).  Despite generally good economic news for the week – better-than-expected consumer confidence and payroll data, strong Chinese purchasing managers’ index, and decent retail sales – investors were in no mood to cheer due to Sandy, the uncertainty of the upcoming elections and the looming fiscal cliff.

Good news – The unquenchable human spirit will prevail and people will rebuild and move-on from Sandy, the elections will be over soon (finally … no more political ads), and the fiscal cliff will, hopefully, regain the attention of politicians in Washington.

History is fairly clear in that the markets will likely move higher into year-end once the elections are over.   We plan to stay the course.

“People never lie so much as after a hunt, during a war or before an election.”
Otto von Bismarck

Slow Recovery Continues

October 30, 2012

10.30.12

Last week’s revised  3rd quarter GDP was reported at 2.0% up from the initial report of 1.7% and also up from the 2nd quarter rate of 1.3%.  Growth in the quarter was still too weak to stimulate significant hiring. The improvement in the 3rd quarter has been driven by consumer spending and an improvement in housing which has added to growth for the last six quarters.  Consumer spending rose at an annual rate of 2% up from 1.5% in the 2nd quarter. Also last week the University of Michigan consumer confidence survey increased to its highest level in 5 years.

However, business spending has been weakening as companies worry about the recession in Europe, slow growth in China and India and the “fiscal cliff” in the U.S. and have been reluctant to hire. On Friday the October jobs report is due and estimates look for 120,000 new jobs. This is the last jobs report before the election.

On the good news side, starting in November, since 1950 the DJIA has climbed an average of 7.5% through April 30 compared to an average gain of 0.4% for the 6 months of May through October.

DON’T GIVE UP ON TECH!

October 23, 2012

10.22.12

Surprising to many, the technology sector has been the weakest sector in the S&P for the last six month period – down 2.5%.  It is still up 13.3% for the 52 weeks but still is one of the weaker sectors. There are the general uncertainties that dampen capital spending like the Euro crisis, the state of the Chinese economy and the looming fiscal cliff in the U.S.  Tech investment is close to a 15 year low as a share of total investment.

Because of this weakness, some measure of pent-up demand has been created.  It is most pronounced in communications equipment and the hardware sectors, reflecting the PC slump.  Remember that Tech investment generally lags during the initial phase of an economic expansion, but then outperforms as the expansion matures.

Adding it all up, the soft patch in tech should prove transitory.  Favored groups include software, communications equipment and storage. Participation in the group should broaden as uncertainty recedes.  We believe this is a timely point to be looking closely at technology.

“Once a new technology rolls over you, if you’re not part of the steamroller, you’re part of the road.”
– Stewart Brand

Weekly Commentary: Consumer Expectations

October 15, 2012

10.15.12

Equities were negative last week with the DJIA down 2.1% and the S&P 500 down 2.2% as investors moved to the sidelines ahead of the 3rd quarter earnings season. Note that year-to-date the DJIA is up 9.1% and the S&P 500 is up 13.6%.

The U.S. economy continues to slowly move along. However, the U.S. consumer seems to be gaining confidence. The October consumer sentiment index posted a surprising 4.8 point upward move to 83.1. Much of the gain came from the expectations component which jumped 6 points to 79.5, the best reading of this economic recovery. Expectations are the orange line on the chart below.

Strong expectations exhibit confidence in future income prospects which bodes well for consumer spending. We’ll look to this week’s retail sales release for more data on the consumer.

As discussed in our most recent quarterly newsletter, “Helicopter Ben & The Wall of Worry”, we continue to focus on the upcoming fiscal cliff and its tax implications.

“New taxes should be a last resort, not an option.”
-Christopher Myers

Ongoing Wall of Worry

October 9, 2012

10.09.12

Another week, another market advance.  The S&P and the Dow both advanced ~1.4% while the Nasdaq was up a more modest 0.6%, held back by AAPL’s post iPhone5 correction. In addition to the ongoing wall of worry, economic and political factors noticeably impacted last week’s market action.

Oil ended a volatile week on the downside, falling by 2.5% to $89.87/bbl.  However, during the week oil fluctuated wildly, buffeted by inventory and output data, weak economic reports out of Europe and China, and rising friction between Syria and Turkey. Natural gas was a partial offset, rising 2.4% to 3.40/MBtu.

Employment data got a lot of attention, since the decline in the jobless data from 8.1% to 7.8% provided an unexpectedly positive sound bite. However, private payroll gains were 20% less than expected, part-time workers who can’t find full-time work rose 8%. Finally, there are still 2.5 million people who would like to have a job if only the economy was better.

Finally, the Wednesday night presidential debate produced an unexpected “win” for Governor Romney. This was positive for the overall market, although there are winners and losers. Energy stocks, especially clean coal issues, benefited, while the prospect for repeal and replacement of ObamaCare weighed on hospital stocks.

Investor focus will shift to the micro level this week, as earnings reporting season begins. Alcoa will kick off the action will a post-close report on Tuesday.

“I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.”
– Thomas Jefferson

Down But Up … the Week and the Quarter

October 1, 2012

10.01.12

Markets were down for the final week of the quarter as news out of Europe spooked investors and US economic data were mixed.  For the week, the Dow closed lower by 1% while the S&P 500 declined 1.3%.  Global equities were lower by 2%.

Not surprisingly, US economic data for the week was mixed as the Chicago manufacturing index fell well short of expectations and US Durable Goods Orders fell to their lowest level in 3 years.  Consumer Confidence and US home sales were better-than-expected.

Despite a disappointing week for US and global equities, the 3rd quarter results were just fine thanks to a coordinated easing effort by central banks around the world.  For the quarter, the Dow finished higher by 3.9% while the S&P 500 was up 5.6% … who would’ve thunk it just a few months ago?

The year-to-date rally in the stock seems to be one of the most disrespected rallies that we’ve seen in some time.  Economic news is quite soft, and geopolitical realities are anything but comforting.  Yet the markets continue their march higher …

The old adage – don’t fight the Fed – is certainly holding true.  We suspect that there will be bumps in the road over the next few months, but a massive amount of cash on the sidelines along with unusually low interest rates will likely move the markets higher towards year-end.  Investors should continue to stay well diversified and vigilant.

Be careful of complacency –

But in all my experience, I have never been in any accident … of any sort worth speaking about.  I have seen but one vessel in distress in all my years at sea.  I never saw a wreck and never have been wrecked nor was I ever in a predicament that threatened to end in disaster of any sort.

E.J. Smith, 1907, Captain, RMS Titanic