The stock market continues to gain ground. One of the biggest reasons was news this week that resales of U.S. single-family homes and condos rose 3.6% in June and to their highest level since October, the National Association of Realtors reported today.
Resales have risen for three straight months for the first time in more than five years. Any good news regarding housing is a boon for the economy and the stock market. However, some economists still believe it’s too soon to say that housing has turned the corner.
“The economy is still losing jobs, credit is still tight, mortgage rates are a bit higher than they were in the second quarter, and the tax credit for first time homebuyers, which is boosting sales, expires at the end of November,” said Patrick Newport, U.S. economist at IHS Global Insight.
Separate of housing, there are signs the company profits are stabilizing and Merrill Lynch economists have declared the global recession is over and a “fragile recovery” has begun. They actually see the U.S. economy growing by 2.70% in the second half of this year. Separately, I read an article in Barron’s Magazine over the weekend in which one economist is predicting that global economies will recover and result in a windfall for U.S. exports. He believes this will propel the U.S. economy to the good old days of growing 3% – 3.5% a year.
Any sign of stabilization or improvement in the economy is good for the stock market. Even though I am beginning to feel better about the state of the economy, I believe it is too early to say we are all clear and it is only up from here on out. I am becoming more optimistic going forward, but I am not calling for the Dow Jones to hit 12,000 in the next six months to year or even 15,000 in the next couple of years as one investment professional is calling for in an interview I saw today.
Inflation – is it on its way or not?
The U.S. government has spent, promised, and borrowed itself into a deep hole. The government has been running the printing presses to fund the bailouts and stimulus plans. Anytime you dump a large amount of something on the market, it becomes less valuable (e.g., the U.S. dollar). As such, there is a real concern that we could see inflation rear its ugly head.
I believe this is a valid concern in the long-term, but maybe not in the short-term (i.e., the next year or more). Since World War II, inflation was mainly tied to tight labor markets. When work is plentiful then employees can demand higher wages and benefits, which forces employers to raise the price of their goods and services to make up the difference. Currently, unemployment is high and most companies are well under full capacity. For example, if a factory is running at 70% capacity, then it has a lot of room to increase production before it needs to raise costs.
Many economists are stating that inflation may not rear its ugly head until 2011 or 2012 or until employment drops dramatically. Just this week Fed Chairman Ben Bernanke told Senate lawmakers that “there is still a great deal of uncertainty.” He believes the economy will pick up speed over time, but other nations will need to boost their domestic demand and cannot rely on the U.S. consumers to drive the world economy. Currently, job losses and insecurity will keep consumers from throwing their money around and banks are still quite restrictive in their lending. Both of these will not only limit the amount of money being spent, but also the rate at which it is being spent. That being said, I do believe higher inflation and energy costs are a given down the road.
Fund Managers’ thoughts
Keeley Small Cap Value is a holding of many IIA clients, and it is managed by John L Keeley, Jr., CFA. You may find some of his comments from his June 30th manager commentary of interest.
- The fund remained committed to stocks despite a very difficult short-term environment. The lack of credit and the brutal economic landscape in recent periods put tremendous pressure on their businesses and provided very little transparency into their future earnings power. Bottom line, due to all the economic and financial uncertainty over the last six to nine months, it was like shooting in the dark when trying to estimate or predict these companies potential earnings in the short-term.
- He felt their conviction in holding these positions was vindicated as many of the same stocks that suffered harsh declines just a few quarters ago proved to be some of the fund’s best performers for the quarter ended 6/30/2009. Additionally, he believes valuations continue to be attractive despite the recent rise in the market. Also, the improving credit environment and stability in the financial markets has provided more clarity into their future prospects.
- He noted that he continues to see encouraging signs that the economy is stabilizing, and more importantly, credit is beginning to flow. He believes that the thawing of the credit freeze was the critical factor in returning confidence to the equity markets. He noted this recession has been severe and difficult; however, the companies held within the fund have endured complicated economic conditions in the past and should emerge intact and more nimble than before. The lack of available credit was extremely complex and daunting – especially for small-cap companies. He noted that there is still a lot of work to be done, but this economic and market environment continues to produce an abundance of opportunities for our portfolios and equity valuations remain compelling (i.e., a good buy).
Quotes
“You judge yourself on your thoughts, but others judge you on your actions.”
Frank J. De Raffele, Jr., business consultant
“Panic is the only behavior that eliminates all your options.”
Paul Saueracker, business executive
“An ethical decision is a tough one with the payout at the end. An unethical decision is an easy one with the payout up front.”
Frank Bucaro, ethics consultant
Tony Moeller, President
Integrity Investment Advisors, LLC
12721 Metcalf Ave., #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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