Current Commentary

Déjà vu (French for "Already seen")

In both 2010 and 2011, the years commenced with an enthusiastic stock market rally, only to sag into serious corrections during  the spring and summer months.  Last year’s market entered a period of  torrid recovery from the heavy sell-off during the summer of 2011, thanks largely to “goosing” by the Federal Reserve and loosening credit policies by the European Central bank. New recovery highs were seen for indexes and many stocks chalked up new all time price highs in recent weeks. Corporate balance sheets are generally healthy and the improved balance sheets of American consumers have sustained healthy revenues for companies ranging from Verizon to Intel, from PPG (a glass and coatings company) to Simon Property, the shopping mall giant. But it seems we have again entered the season of market correction. And while I’ll leave the “why”  to the quoted economists below, I cannot help but worry when commodity indexes and the new high/new low equity indicator are cascading downward while bond yields are registering new all time lows (and the price of older bonds is rising).

The conservative way in which we at Trusted Financial invest, in the “Value/balanced” style,should serve our clients well in the current darkening environment. There are many Big Picture reasons for the current sell off, and I’ve selected three analysts from whom to quote for your reading pleasure, below.  Why do I quote others? Because my job and talent is not in assessing Macro economic trends but in reacting to them appropriately when deciding what to buy, what to sell and what to hold.  Still, I do have a sneaking suspicion that we may be living through a replay of the 1930’s, in which a rapacious market crash, 1929, gave way to a healthy market rally, only to slump once again under the weight of unwise government policies, a persistent unwinding of real estate excesses and strangulation by over-regulation. The 1930’s became known as the Great Depression, but the decade was, in fact ,a series of recessions, interspersed with meaningful market rallies.  The best investment during this era high  was quality government and corporate bonds.

Despite a worrisome development in France, one with negative implications for the survival of the Euro, U.S. stocks not only managed to rally Tuesday, April 24th and a couple of our core client holdings achieved new all time price highs.  How to explain this?  An analytical service to which we subscribe, “Chart of the Day” (www.chartoftheday.com) suggests that with the “corporate earnings yield” above 4%, and over 70% of S&P 500 companies reporting positive earnings surprises, we can expect further appreciation for the market over the remainder of the year.  This, of course, does not preclude the possibility of a strong correction along the way.

Right after Thanksgiving last year, I sat at lunch with a client. We were in the midst of another hefty fall in stock prices after a market advance off last summer's crash failed at the 200 day moving average. The financial press was mostly gloom and doom. High unemployment, another bad housing report, pre Christmas retail sales in doubt etc. [...]

I've posted our year end Financial Review and Outlook contained in our Newsletter for January, 2012. The bumps experienced by many investors in 2011 were cushioned by our Balanced/Value style and most clients had what they have told me was a positive, satisfying experience. This, despite the highest volatility for equities since the dark days of 2008 and headlines suggesting impending [...]

Bill Gross, PIMCO’s “Bond King” and manager of a mutual fund widely held in our client portfolios was interviewed just before Thanksgiving 2011 on Bloomberg TV. Among his comments he revealed how he personally is positioned with his investments. This part on how Gross is invested was interesting:

Bloomberg today features an article by an Indian author who begins by wondering why protests against "The System" in developed nations has not found traction in places like China, India and other rapidly growing, aspirational nations. He cannot seem to deal with the fact that few people in these booming economies appear unhappy with capitalism. It finally has motivated me to comment on the "Occupy Wall Street" phenomenon, which I find rather annoying. The article in question demonstrates a strong desire to twist facts. The author suggests the lack of an "Occupy Wall Street" faction in financially expanding nations, ignores the plight of suffering masses. This suits his message supporting oppressed workers. The two groups are, in my view, entirely different. Sure, working conditions in the "Third World" are far from ideal as they once were in the United States,during it's heyday as a blue collar nation, growing rapidly, a century or more ago. Undoubtedly protests by workers have been brutally suppressed, particularly in China. Likely, these difficult conditions will be addressed by those societies with time. By contrast, in my perception, the "Occupy" people appear to be driven by an entitlement mentality unknown to a miner in India or a trucker in Brazil. Folks in the Third World are grateful for jobs, and too busy working to show up at protests.