January 22, 2013


Some of you , like me, attribute this famous quote to Winston Churchill.  Googling tells me it was FDR not Churchill who spoke these famous words. The context referred to economic fear and concern about declining markets.  Today I read a piece that eased many of my fears on the economy by Citigroup.

The reason for the commentary was a decision to boost their forecast of economic growth from 2.0% to 2.4% for 2013.  In addition they have raised their projected earnings on the S & P 500 to $110 from $108.  One of the undeniable positives is the amount of cash on corporate balance sheets.  In addition to nice dividend increases, corporations repurchased 8 billion shares of their companies in the eighteen month period ending October 2012.

One of the drivers of growth in 2013 will continue to be the housing industry.  Housing starts, housing prices, and housing inventories are all positive. One forecaster predicts the housing industry will be adding 25,000 jobs per month.

The final data point: household wealth last year in the US increased by 8% or $5 trillion.  With interest rates so low, some of this rediscovered wealth should flow over to the equity markets.

Maybe FDR had the right idea about fear.  Prudent investing, taking into account all information available is the way to go.

Inflection Point?

January 14, 2013


This week earnings season really gets in gear with many of the large financials scheduled to report 4th quarter earnings including Citigroup, J P Morgan and Bank of America, as well as Intel and GE. Look for earnings overall to be up about 3% for the quarter for the S&P 500 which is down considerably from analyst estimates of 14% in the spring of 2012. For 2013 most estimates are for a 7%+ earnings go ahead which could be a stretch given the headwinds of recent tax increases and the as yet unknown budget cuts which may be forthcoming from negotiations over deficit spending.

This year is off to a good start with equities leading the way. So far the S&P 500 is up 3.2% ytd and in the week ended last Wednesday $18 billion has flowed into equity mutual funds and $1.1 billion was pulled from U S Treasury funds. With treasury rates still near record lows and investment grade corporates and junk bonds also at or near record lows this could be the beginning of a shift away from bonds with the average stock yielding 2.2% and the average triple A corporate at 1.6%.

Much could depend on talks on the fiscal deficit in the next few months.

“a strategic inflection point is a time in the life of business when its fundamentals are about to change. that change can mean an opportunity to rise to new heights. But it may just as likely signal the beginning of the end”
– Andrew S. Grove, Only the Paranoid Survive


January 7, 2013


2012 was certainly an unforgettable year with so many headline risks such as: the election, U.S. national debt, slow economic growth and high unemployment, the Eurozone troubles, China slowdown, Facebook IPO, and so on. In the face of uncertainty, global equity markets posted double digit returns, and even the Dow Jones Industrial advanced a 7.26%.

The fiscal cliff was partially resolved last week. For example, the Bush tax cuts were extended for individuals making less than $400k and households making less than $450k. However, the 2012 payroll tax cut was allowed to expire which will reduce consumers’ paychecks. Congress postponed the sequester (spending cuts) until March 1st and they still need to address the debt ceiling.

Regardless, some progress on the deficit has been made.

Fourth quarter earnings season kicks off this week with Alcoa and Wells Fargo. We are interested to hear from both companies as they provide insight into the U.S. and global economies.

“It is better to take many small steps in the right direction than to make a great leap forward only to stumble backward.”
– Chinese Proverb

Broken Hearts

December 17, 2012


In light of the horrific events at Sandy Hook Elementary School in Newtown, CT, we are not posting any market commentary this week.

Our hearts are broken, and our thoughts and prayers go out to all the victims of last week’s tragic event.  The tragedy in Newtown is yet another reminder that each day is a gift.


Three Yards and a Cloud of Dust

December 10, 2012


The markets moved somewhat higher last week, with the Dow Jones Industrials advancing by 1.0%, but the S&P was flat and the Nasdaq declined by 1.1%. The latter were held back by AAPL, which fell 8.9% last week. It has developed both fundamental and technical challenges.

The US economy is still in a slow-growth mode. November nonfarm payrolls increased more than expected, but added only 146,000 jobs [down from last month’s 171,000 originally reported increase {now revised down to 138,000}]. The civilian unemployment rate declined to 7.7% from 7.9%, but this was driven by a decline in the size of the workforce [the “participation rate” was lower].

Moreover, consumer sentiment has turned markedly lower, falling to 74.5 from last month’s 82.7. This decline is variously attributed to the “fiscal cliff” histrionics, ongoing European difficulties [Greece lost its CCC credit rating] or election results implications [ObamaCare rules release, 2013 tax increases details or …].

In the midst of this lackluster environment, it is important to watch the Fed. It continues to print money, and it is never wise for investors to “fight the fed”.

“You can’t change the past, but you can ruin the present by worrying about the future”

Cliff Walk

December 3, 2012


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


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


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


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


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