You would have to go back to May of 1962 to find a worse month for U.S. stocks. As of the close of business yesterday, the combined averages of the Dow Jones Industrials, S&P 500 and NASDAQ are down 7.11%. As Jeff Layman, chief investment officer at BKD advisors, noted in today’s Wall Street Journal, “We’re having a nice tug-of-war between some pretty solid economic fundamentals, great corporate fundamentals (in the U.S.) and all these world issues with effects that investors think might spread.”
Economically, we are seeing improvements in the U.S. The recessionary clouds are gone and the sun is shining; however, the worries are that problems overseas could bring the bad economic storm clouds back to the U.S.
It may be a global financial system, but some members are going to need to get their financial houses in order
Unfortunately, the stock market is trending down today due to a ratings downgrade of Spain’s (government) debt. This is not a surprise. Just this week, the International Monetary Fund (IMF) issued a blunt warning to Spain that it needed a “radical overhaul” its labor laws and a “bold” reform of its government pension system.
Along these lines, many analysts believe that at some point Greece will need to restructure their government debt. Restructuring means either defaulting on your debt or only payback a portion (i.e., maybe 30 – 50 cents). This is something that has occurred in the past in other countries. The stark reality is that the changes taking place in Europe will play out over many months. The European model of generous benefits is going to be trimmed back dramatically and each country’s respective citizens will realize that like it or not, they will be more and more responsible for their well being.
Actually, as painful as this cultural change will be, it is good in the long run. Basically, citizens will find that the training wheels are being taken off their personal financial lives and they will need to learn how to ride without them. That being said, this may result in individuals becoming much more creative and assertive in bettering themselves financially.
Just this week, U.S. Treasury Secretary Timothy Geithner was in Europe advising many of foreign counterparts on what actions they need to take to stem their financial problems. Unfortunately, there are critics that believe that some of Mr. Geithner’s advice will actually cause more problems going forward. These critics believe that repeated bailouts will only make the problem worse and providing more financing to heavily indebted countries like Greece won’t succeed.
The current situation in Europe and actions being taken is causing a crisis in confidence as it relates to the global financial system. The system works when all or the vast majority of parties live within their means (i.e. budgets) and are able to cover their obligations. Unfortunately, the system breaks down when various members (i.e., countries) don’t spend responsibility and are reluctant to take the hard measures to correct their problems.
The economic equation is simple: global economic confidence = stable and increased lending between banks and countries = economic growth = increased jobs = higher corporate profits = investment gains. If you take out global economic confidence, then the rest of the equation starts to suffer.
Counter to all this negative news is the announcement this week that the Organization for Economic Cooperation and Development (OECD) raised its forecast for global economic growth this year and next. The report sighted extremely strong, possibly overheating, growth in Asia, decent growth in the U.S., but Europe lagging.
Market volatility can equal opportunity?
I cannot tell you what direction the stock market will take tomorrow, let alone next week. However, I can tell you that many institutional fund managers are scrutinizing their holdings. I have spoken with several mutual fund representatives or read their respective manager’s commentaries regarding the opportunity they’ve seen in the recent market volatility. Some of these managers keep their eyes open for specific price breaks on a particular stock or bond. For example, they may believe that XYZ stock or bond offers great long-term potential, but won’t buy it unless it hits a price they believe is a bargain. As such, market drops allow them to nibble at / buy new shares and gradually build a position in that security.
I believe that investing is a lot like shopping. You may like a particular car or item of clothing; however, you wait for it to go on sale before you buy it. For many mutual fund managers, they actually take advantage of market declines to slowly build what they consider sizeable and profitable long-term positions in particular securities. Trust me, if you are a sales person, you would not want them as a client. They may visit your store every day over a nine-month period; however, they don’t buy that particular designer suit until it’s marked down 50%.
Consumers are showing signs of life
Costco Wholesale Corp. reported a big jump in earnings this week. The company’s CEO, Richard Galanti, stated the following in a conference call with analysts, “people were frugal last year and some of them are tired of being frugal, and they’re buying things for the home.” I believe that many consumers caught “Spring Fever” over the last several months and are spending money after being reluctant to do so during the recession.
Also, from articles I read on several publications, it appears that the U.S. consumer is striking a fine balance between spending and saving. Unfortunately, a good portion of this savings is due to lower debt payments due to defaults. Money is freed up since the consumer has defaulted on a credit card, car or home loans. Banks will continue to struggle from losses from souring loans. However, this type of purge is needed for the economy to truly recover.
Quotes
“Investors who seek funds in which managers are willing to invest their own money seem to significantly tilt the odds in their favor. The correlation is absolute and significant. Among equity funds, the correlation of better returns is stronger with manager ownership than it is with low costs.”
Don Phillips, Morningstar Advisor, February 18, 2010
“U.S. consumers are shedding debt at the fastest rate in more than six decades, largely through a wave of defaults, in a trend that underscores the depth of their financial troubles but could also help clear the way for a stronger economic recovery.”
Mark Whitehouse, The Wall Street Journal, March 12, 2010
“Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
John Templeton, Legendary mutual fund manager
A salute to all veterans this Memorial Day Weekend!
Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074
The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.
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