Founder & Chairman
I think it’s safe to say we’ve all had enough with the “April showers” nonsense, and we’re ready for the “May flowers” part. Complaining about the weather is a lot like complaining about the stock market, in the end there is nothing you can do about it, just make sure you dress right. I have been amazed recently, at how many “experts” have chimed in on the subject of the weak dollar and associated topics such as the rise in gold, oil and government debt. I have to say I’ve seen this movie before. Twice. I remember in 1999 getting tech stock recommendations from 79 year old widows…”you know Terry, you should really look into …(insert failed tech startup here)”. In 2006, it was the newly retired line worker from whichever auto company you care to insert…”I’ve made so much money in real estate that I retired, you know Terry, they’re not making any more of it. The way to make money in real estate is not by making your payments, but by letting the value of the property appreciate. You want to put as little down as you can, and borrow as much as you can.” Sage advice, clearly.
Hit the fast forward button, and here we are in 2011. It shouldn’t faze me anymore, heck, I’ve been in this business since 1990, but frankly, it still does. How do people continue to make the same mistakes over and over and over…I digress. Have you noticed the number of books, commercials, pawn shops, tv shows about pawn shops etc. that have popped up all trying to profit from the rise in gold? Doesn’t this feel like De Ja Vu all over again? Take a couple of minutes and try to think back to a time where one asset class (stocks, bonds, real estate, gold etc.) was so overwhelmingly popular that it was obvious to even the most casual observer? How’d that work out? I’m not saying gold will collapse tomorrow; these things can go on for longer than anybody would believe, but I do know that when they end, it usually isn’t pretty.
I know, I know but Terry, “its different this time” right? The world is moving away from the dollar as the reserve currency, our government is spending money faster than Charlie Sheen’s career is falling; helicopter Ben broke the off switch on the printing press. All of these statements could be true, but it doesn’t mean the only logical conclusion is that commodities continue to go up. Look back to what happened to commodities when the financial melt down took place in 2008. Unfortunately, there are too many people jumping on that bandwagon right now, which increases the risk of an unwanted outcome. Perhaps the biggest mistake anyone can make when it comes to the finance business is allowing unwarranted overconfidence in a particular outcome to skew the basic fundamentals of responsible money management. In other words, don’t bet too heavily on a particular outcome that looks beyond obvious because more than likely you will be wrong.
This leads us to the present market. It’s confounding to see the market’s constant march upwards, knowing that there are massive structural problems that, to this point, have largely been ignored. My guess is that this cannot go on too much longer. Even in the last few days, the market has pressed on, erstwhile corporate earnings, while still solid, are showing signs of slowing down. Top line revenues in many cases are either growing at a slower rate, or even shrinking. The meteoric rise in oil prices will eventually have to impact both consumers and businesses; some consider it a “tax on the economy”. Recent economic data has suggested that housing prices have actually peaked and may be falling again (I know you’re thinking… “peaked, really?”). These are only a handful of the myriad issues one could take with the current economic landscape. We’ll save the bigger problems (like the idiotic bickering in congress over 60 billion dollars in spending when the budget deficit is over one trillion dollars) for another day. This should cause one to stop and ask what then is driving the market ever higher. Frankly, I don’t think anyone really knows, but I will offer a couple of possibilities. Clearly, Federal Reserve liquidity injections into the banking system have placed a massive amount of cash (roughly 80 billion dollars per month since December) in the hands of a select group of banks who then take some portion of that money and invest it, thus probably driving certain equities and commodities higher and higher. Earlier on, earnings had nowhere to go but up, so the persistent drumbeat of better than expected earnings results helped as well. Sprinkle in improving spending/economic conditions and you have the makings for a pretty powerful rally. Remember, the market looked like it was running out of gas last August and September, until the Fed announced it would engage in another round of Treasury purchases. From then on it was off to the races. We know those outright Fed purchases end in June. Leaves one to ponder the possibilities.
Any discussion of market conditions would be incomplete without the mention of recent weakness in the U.S. dollar. There are pros and cons related to a currency that is lower relative to others who we trade goods and services with. That said, I would caution anyone who thinks there is only one possible outcome on this issue. Fortunes have been lost many times over by very smart people who myopically assumed that common sense prevails and logic dictates the final outcome. Many assumptions are being made, from a basic lack of intelligence inherent in the collective think tank at the Federal Reserve, to gold being the only logical replacement to the current world reserve currency, to the absolute demise of the U.S. credit rating and on and on. While these are all possibilities they are certainly not the only ones, and probably not even likely ones. Only time will tell for sure, but if history is our guide, it would tell us to expect the unexpected.
As for what to do right now, from our vantage point, nothing. Our models are currently positioned to benefit moderately from a continued rise in equities, and should be reasonably protected should things start to fall apart. Prudence suggests a balance here is the best approach as conditions appear to be deteriorating. We are leaning towards some variation of the “stay away in May” approach, although to practice what we preach an entire exit probably isn’t the best approach. Rest assured we are vigilantly collecting data, monitoring conditions, looking at technical indicators and intently listening for clues to future Federal Reserve actions. Remember, bulls can make money, bears can make money and pigs get slaughtered. There are times to be greedy, but this clearly is not the case today.
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