The Good, The Bad, and The Ugly
The Good
- The U.S. Labor Department reported today that private employers added 67,000 workers last month. However, it also reported an increase in the unemployment rate, but the majority of that increase may be attributed to temporary census positions coming to an end.
- Yesterday the Institute for Supply Management reported that U.S. manufacturing rose in August and a similar index in China did as well. This news provided a huge boost to U.S. and international stock markets, and a welcome break from the recent declines and pessimism.
- The number of buyers who signed contracts to purchase homes rose 5.2 percent in July after hitting a record low in June, according to the National Association of Realtors.
- Retailers reported better than expected back-to-school sales, which are a sign that the consumer is not only alive and breathing, but spending.
- I have spoken with two local business owners this week; one owns a professional services firm, and the other is a co-owner of a manufacturing firm. Both indicated that they have not only navigated through the recession (i.e., survived), but now they are receiving new business orders and spending money to expand (i.e., thrive). It is encouraging to see small business owners / entrepreneurs taking positive steps and using an uncertain environment to expand and strengthen their businesses.
The Bad
- I do believe uncertainty still reigns supreme. As a matter of fact, notes released this week from the Federal Reserve’s August 10th meeting show that officials concluded that the U.S. “was operating farther below its potential than they had thought, that the pace of the economy had slowed in recent months and that growth would be more modest during the second half of 2010 than they had anticipated.” Fed officials believe the economy has drifted even farther away from its long-run potential than previously thought. This conclusion supports what Mr. Michael Boskin, Stanford economics professor and senior fellow at the Hoover Institution, stated in a Wall Street Journal op-ed piece yesterday. He noted that current economic recovery is quite dismal compared the recoveries in the 1974-75 and 1981-82 recessions.
Possibly, The Ugly
- Currency trading has grown substantially over the last several years. To give you some perspective, U.S. stock trading averaged about $134 billion a day in April of this year. Whereas, currency trading volume around the world has hit $4 trillion a day. Much of this is due to investors in the wealthiest nations looking to diversify outside their home markets in times of turmoil, which I can understand. However, mutual funds and ETFs have picked up on this trend and now offer small investors a chance to get in on the action. One important aspect to all of this is that currency trading usually involves placing bets with borrowed money. Currently the Commodity Futures Trading Commission allows investors to borrow up to $50 for every dollar invested, which is down from the prior limit of $100 borrowed for every dollar invested. As such, regulators are becoming concerned about individual investors’ ability to handle large amounts of leverage, though it has been limited thus far. Basically, for the vast majority of investors, I am not keen on the idea of investing borrowed money, especially knowing that this type of speculation is what created the recent “Great Recession.”
- The U.S. Securities and Exchange Commission is investigating “quote stuffing.” This occurs when a large volume of trades are placed, essentially flooding the market with orders and then the orders being cancelled within fractions of a second. The concern is large institutional traders are using these nanosecond orders to manipulate stock prices for a quick profit. Also, this high-frequency trading may have played a part in the “flash crash” which occurred in May of this year and could cause similar events in the future.
- The second largest municipal bond default this year occurred when Harrisburg, PA (the state’s capital city) defaulted this week on a $3.29 million payment due investors. There has not been a flood of municipal bond defaults, but this is just a sign of how precarious some states’ and cities’ finances are.
In conclusion: The first trading day in September started with a bang; however, September historically has been a challenging / negative month for investors. In addition, last month was the worst August for U.S. stocks since 2001, and some analysts believe that September’s normally negative returns came early this year. Investor and, in my opinion, consumer sentiment has been so negative that any glimmer of hope or positive news will boost stock prices. In addition, short sellers, who make bets via selling stocks that they believe will decline, may have purchased back those shares to cover their positions in light of the recent stock rally. Thus, part of the rally may be short sellers covering their bear market bets versus it being money going into stock purchases for long-term investment purposes.
For a good portion of this year, the stock markets in the U.S. and around the globe have been volatile and oriented toward short-term trading and not investing. This combined with all the economic uncertainty has caused, and continues to cause, huge amounts of money to remain on the sidelines or flood into bonds.
Along these lines, I heard an analyst on CNBC this morning state that he believes that the U.S. and possibly other overseas stock markets may rebound in September, but then back off in the following months. Personally, I believe this makes sense. Between now and the end of the year, we may continue to see volatility and the economy remain sluggish, but move in a positive direction. In addition, investors are clamoring for returns better than the minimal amounts being offered in CDs, savings, checking and short-term bonds. Thus, once we see some continued positive economic news, that money on the sidelines will begin creeping back into the market. I have spoken with several CPAs, attorneys, business owners and other professionals, and they all have the same opinion; give me some certainty as it relates to my (individual and firm’s) income tax rates, estate tax laws, and various other regulations and policies, and then I can make plans and feel more comfortable spending and investing money.
I know I have been somewhat negative in my prior commentaries; however, we are almost three- quarters of the way through this year, and the three major U.S. stock indices (Dow Jones Industrials, S&P 500 and NASDAQ) are all in negative territory. I may be completely wrong, but I believe the remainder of this year could be somewhat flat for stocks, but 2011 shows promise. This belief is based upon a picture of companies rehiring, certainty on tax rates, investors willing to take more risk, and consumers finally succumbing to a pent-up demand to spend. I believe we saw consumers break out their wallets in the beginning of this year, and we saw stock prices react positively. However, uncertainty returned and caused them to close their wallets and stocks reacted accordingly.
This past recession has been long and brutal for all. As such, if we get a glimmer of clearer skies late this year and the beginning of next year, then it can set the stage for a more lasting economic recovery and stock market rally (i.e., bull market). Let’s hope that in 2011 cash hoarding, bond buying and high-frequency trading / speculation become a passing fad and take a backseat to more traditional / fundamental investing. Disco and dot.com stocks had their hay days and many considered them to be permanent fixtures of our society. Well, I believe, in the years and decades to come, many of those individuals or investors who took extreme measures and abandoned diversification and investing in stocks for the long-term will find that investment strategies (in hindsight) will be as popular as a Saturday Night Fever album at a garage sale.
Quotes
“Research shows that when we count three blessings a day, we get a measurable boost in happiness that uplifts and energizes us. It’s also physically impossible to be stressed and thankful at the same time. Two thoughts cannot occupy our mind at the same time. If you are focusing on gratitude, you can’t be negative.”
Jon Gordon, consultant and motivational speaker
“Draw from the past, live in the present, work for the future.”
Abraham Geiger, rabbi and scholar
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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