Commentary for the week ending October 30, 2009
The Commerce Department reported yesterday that the U.S. economy, fueled by government stimulus, grew 3.5% from July through September. The rebound ended the record streak of four straight quarters of contracting economic activity. Exports of U.S. goods soared at an annualized rate of 21.4 percent in the third quarter, the most since the final quarter of 1996. Businesses, meanwhile, reduced their stockpiles of goods less in the third quarter, after slashing them at a record pace in the second quarter. With inventories at rock-bottom levels, even the smallest increase in demand probably will prompt factories to boost production. This restocking of depleted inventories is expected to help sustain the recovery in the coming months, economists said. The news lifted stocks on Wall Street.
But the government aid, from tax credits for home buyers to rebates for auto purchases, is only temporary. Consumer spending, which normally drives recoveries, is likely to weaken without it. The National Association for Business Economics thinks growth will slow to a 2.4 percent pace in the current October-December quarter. It expects a 2.5 percent growth rate in the first three months of next year, although other economists believe the pace will be closer to 1 percent. Still, with unemployment at a 26-year high of 9.8 percent and credit hard to get, the recovery faces obstacles.
For a positive outlook on the stock market and U.S. economy, please see the following is a link to recent interview with James Altucher managing director of Formula Capital, an asset management firm and fund of hedge funds. He shares his views on why 2010 will be an explosive year for stocks and the economy.
Political Uncertainty Puts Freeze on Small Businesses
The economy remains unsteady 22 months after the recession began, with banks restricting credit and consumers hunkering down. For many small businesses around the country, there’s an additional dark cloud: uncertainty created by Washington’s bid to reorganize a wide swath of the U.S. economy.
The economic contraction is of course the prime force driving companies to lay off workers. However, health-care overhaul grinding through Congress could bring unknown new obligations to insure employees. In addition, tax rates are set to rise at the end next year. Legislation aimed at tackling climate change might raise businesses’ energy costs. Meanwhile, a bill aimed at increasing transportation spending is stalled.
Many companies say they have responded by freezing hiring, cutting benefits and delaying expansion plans. With at least 60% of job growth historically coming out of the small-business sector, according to the government’s Small Business Administration, that kind of inertia could impede an economic recovery.
Employment data released this month showed worse-than-expected job losses. According to a National Federation of Independent Business survey, 16% of small business owners said they plan to cut staff or not fill vacancies, a three-percentage-point increase over August. Only 7% said they planned to create new jobs. The survey concludes that more business owners are planning to contract than expand. In August, businesses were split equally.
There is little reliable data explaining why companies are retrenching despite signs of life in the economy, including recent increases in production in some industries and rises in housing prices and new home sales. However, a variety of organizations that monitor business behavior, including the NFIB, the Associated General Contractors of America and the National Small Business Association, say political uncertainty is a substantial factor, alongside other more typical problems, such as availability of credit.
As one chief economist at a large ratings firm noted, “No question, this is a tough issue for a lot of these companies…It’s all anecdotal, and it affects everybody differently, but the one common factor is people postpone decisions, and I’m afraid that’s going to slow us down coming out of the recession.”
In a recession, some business owners actually want to spend cash to get out of the recession. But with this uncertainty hanging over their heads, they’re afraid to use their resources to buy more equipment or hire more people. They can’t proceed under business as normal when there’s no clear direction out there. It’s too dangerous to bet on the future and put your company in financial jeopardy.
Gold as insurance
In the attached video link, Ahbay Deshpande, portfolio manager with the First Eagle Gold Fund, explains why and how gold is used as an insurance policy for investors in uncertain times. I hope this may help explain why I have added precious metal and natural resource funds to some portfolios.
My observations
A recent Wall Street Journal article states that Intel is seeing corporations interesting in spending money on technology equipment (i.e., PC’s, servers, etc.). This combined with announcements from the International Monetary Fund that it sees economic growth across Asia is good news for us in the U.S… On the flip side of the coin, I have spoken with clients who have either lost their job, seen a dramatic pay cut or are planning to downsize their business.
These individuals have seen their spendable dollars decline, which is what fuels private and publicly traded companies’ profits. The underlying health of our economy is not the Microsoft, General Motors or other Fortune 500 companies. It is the small to medium-size businesses that employ the majority of workers in the U.S. and buy from these large companies. As such, any long-term sustainable economic growth and bull market will not take place until we see improvement for the little guys on Main Street, not the headline news coming from Wall Street.
Approximately 1/3 of the last quarter’s economic growth came from individuals purchasing cars under the cash for clunkers program and another 1/3 came from home building, which has been supported by the first time home buyers’ credit. Our economy will not stay healthy, stable and robust when 2/3’s if its growth is the direct result of short-term government subsidies. When these subsidies expire, then the rug / foundation of our economic growth will be pulled out from under us. As such, this concern is very much on the mind of many investment professionals and investors, which is why there is still an enormous amount of cash on the sidelines. I believe this may be a good thing, since this cash at some point will make its way back into the market over time. However, it will take continued positive economic news for this to occur. Having many investors on the sidelines is analogous to a second gas tank for a long road trip / bull market. With all the various proposals being bantered about in the House and Senate, businesses and many consumers will decide to sit tight on their spending until they know the final outcome and ramifications, and I can’t blame them. It would be unwise to go forward with increased or new spending and then find out that new legislation has increased your cost of business.
For now, patience is a virtue and emotions need to be tempered.
Quotes
“Wisdom and virtue are like the two wheels of a cart.”
Japanese proverb
“The best thing about the future is that it comes only one day at a time.”
Abraham Lincoln, U.S. President
“The spirit, the will to win, and the will to excel are the things that endure. These qualities are so much more important than the events that occur.”
Vince Lombardi, legendary football coach
Happy Halloween – with three children age 8 and under, I can already see their catatonic stares and lips smacking every time they see their costumes.
Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074
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