Saturday, March 24, 2012

The Closing Bell -- Price is truth


The economy is a modest positive for Your Money. Not much data this week and what little we had was mixed--most of the negatives came in the housing area, which is clearly still struggling.; while the bright spots were weekly retail sales, weekly jobless claims and the February leading economic indicators.

None of this gets me any closer to the generally accepted more optimistic viewpoint for the economy. I continue to believe that preponderance of economic stats points to a sluggishly growing economy. By that I mean that it is getting better but less than expectations.

To be sure, I have acknowledged that the results of last week’s bank stress test are not only a major positive but also have a much more significant impact than a single week or month’s datapoint. But as I look at it, the improving US bank balance sheets act less as a upward jolt to the economy and more as a disaster preventative if the economy starts to falter or if a financial crisis in Europe leads to massive defaults in the derivatives market. Nonetheless, it keeps the risk that our forecast may be too pessimistic alive and well; and if you agree with the prevailing investor sentiment, then this risk is the most significant one to our outlook

However until the data convince me otherwise, our forecast remains:

‘a below average secular rate of recovery resulting from too much government spending, too much government debt to service, too much government regulation,.... and a business community unwilling to hire and invest because the aforementioned along with the likelihood a rising and potentially corrosive rate of inflation due to excessive money creation and the historic inability of the Fed to properly time the reversal of that monetary policy.’

The transmission mechanism for inflation (short):

There are, of course, other risks to the economy about which, again, I am at odds with consensus. I see these as far more likely than the economy growing faster than our forecast.

(1) oil prices continue at an elevated level. Gasoline prices are still rising and as long as that occurs, a heavier tax on consumer incomes is being levied and raw material costs for industry are escalating. That is not a prescription for a robust economic recovery. Obama’s bulls**t energy initiative is all talk and will do nothing to reverse this trend; and I don’t see anyone ready to play nicey, nice in the Middle East. Certainly the recent escalation of hostilities between the Israelis and Palestinians isn’t helping.

(2) after the decidedly positive data flow last week, this week’s US numbers as well as the apparent weakening in the Chinese and EU economies provide some support for the ECRI’s recession call. As you know, its own readings of late have been seemingly contradictory to that viewpoint. Indeed, this week it improved yet again [tenth week in a row]. Nonetheless, I leave it in our list of risks because of [a] its track record for calling economic downturns and [b] the founder remains adamant in his forecast and [c] it serves as an offset to the Market’s recent enthusiasm with which I am admittedly quite skeptical.

This week’s summary (medium):

(3) Europe continues to be relatively calm on the surface though the headlines remind us that all is not well. This week witnessed the Greek economy turning to the barter system, Spanish bond rates once again starting to rise and weak industrial production not only across Europe but in China as well. My worry is either a major recession in the EU and/or another country following Greece in to bankruptcy but with much graver consequences.

Bottom line (unchanged): ‘the US economy continues to work its way higher with the chief debate focused on its rate of increase.

Our political class maintains its destructive behavior toward the economy and the electorate.

The Europeans remain hunkered down in their foxholes, praying no one notices them.

Finally, oil prices haven’t budged from their historically damaging heights; and the reason for their current elevation is no closer to being resolved, unless you think that one more US carrier group in the Middle East is a cause for celebration. Sooner or later, these high oil prices are either going to decline or collide with all the investor euphoria over a better than expected improvement in the economy. Absent a decline, history suggests a nonoptimal resolution for both the economy and investors.’

Statistical Summary

Current Economic Forecast


Real Growth in Gross Domestic Product: +1.5- +2.5%
Inflation: 2-3 %
Growth in Corporate Profits: 7-12%


Real Growth in Gross Domestic Product (revised): +1.0- +2.0%
Inflation (revised): 2.5-3.5 %
Growth in Corporate Profits (revised): 5-10%

Current Market Forecast

Dow Jones Industrial Average

Current Trend (revised):
Short Term Up Trend 13025-14366
Intermediate Up Trend 11310-16300
Long Term Trading Range 7148-14180
Very LT Up Trend 4187-14789

2011 Year End Fair Value 10750-10770

2012 Year End Fair Value 11290-11310

Standard & Poor’s 500

Current Trend (revised):
Short Term Up Trend 1374-1484
Intermediate/Short Term Up Trend 1188-1755
Long Term Trading Range 766-1575
Very LT Up Trend 644-2000

2011 Year End Fair Value 1320-1340

2012 Year End Fair Value 1390-1410

Percentage Cash in Our Portfolios

Dividend Growth Portfolio 28%
High Yield Portfolio 28%
Aggressive Growth Portfolio 28%

This week’s data:

(1) housing: weekly mortgage applications plunged but purchase applications were down only 1.0%; February housing starts were a disappointment though building permits were strong; February existing home sales fell fractionally while the January number was revised up significantly; February new home sales were down 1.6% versus estimates of modest increase,

(2) consumer: weekly retail sales were again positive; weekly jobless claims were a pleasant surprise,

(3) industry: none,

(4) macroeconomic: the February leading economic indicators came in slightly better than expected.

The Economic Risks:

(1) the economy is weaker [stronger] than expected.

(2) Fed policy (reading the data correctly).

(3) a disruption in global oil supplies (It is not the price of oil but its availability that will cause severe economic dislocation.).

(4) protectionism (Free trade is a major positive for world and US economic growth.).

(5) fiscal profligacy (Government spending as a percent of GDP is too high and the looming explosion in entitlement expenditures will make it worse. There is no good solution save spending discipline.).

(6) a rising tax and regulatory burden (Government has never proven that it could solve economic problems efficiently or satisfactorily.)


The domestic political environment is a neutral but could be improving for Your Money while the international political environment remains a negative.

This is long and a bit too pessimistic for me; but it is very thought provoking and is today’s must read:

Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder. Stevens and Clark and Bear Stearns, managing a risk arbitrage hedge fund and an investment banking boutique specializing in funding second stage private companies. Through his involvement with Strategic Stock Investments, Steve hopes that his experience can help other investors build their wealth while avoiding tough lessons that he learned the hard way.