I hope you find the following comments informative, enlightening and maybe even humorous.

“Across Europe just now men who thought their title was “minister of finance” have woken up to the idea that their job is actually government bond salesman.”  

                    Michael Lewis, Vanity Fair, March 2011

“Ten years ago at the top of the dot-com bubble, public companies reported huge earnings, but they were hemorrhaging cash at a rate of $125 billion annually.  Today U.S. companies are generating gross cash of $250 billion—the most recent 2009 figures.  With so much free cash flow, companies are better able to return money to shareholders via dividends or share buybacks.”

                    Charles Clough, Barron’s, January 29, 2011

“Since 1928, the average bull market has lasted 57 months providing a 164% gain.  Our current “baby” bull has furnished investors with a 91% price return in a mere 23 months.  The data are similarly as compelling if one looks at the duration of economic expansions.  Our current recovery has been underway for 20 months while the average duration has been 45 months over the last 110 years.”

                    Jason Trennert, Investment Strategy Viewpoint, February 4, 2011

“If you look at how equities have performed lately, there’s an argument to be made that, early in 2011, there’s been some kind of global disconnect going on.  The S&P 500 is up nearly 6% this year.  The MSCI Emerging Market ETF, which outdistanced U.S. equities last year, is down nearly 4% for 2011.”

                    Bob O’Brien, Barron’s, February 12, 2011

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As I am writing this, U.S. stocks are declining as falling commodity prices prompted an unwinding of bets on risky assets and raised questions about the strength of the economic recovery.  In the prior months, the stock market showed ample strength in the face of higher commodity prices, because it was a sign of global economic growth / demand.  However, valid concerns were raised that higher commodity prices would hurt corporate profits and consumers’ wallets.  Now we are seeing lower oil and other commodity prices; which is a savings for both corporations and consumers, but raises a concern that we are seeing signs of slowing global growth and the stock market reacted negatively. 

I find this reaction quite ironic.  The stock market reacted favorably to higher commodity prices and just the opposite when they decline.  The market movements in the short-term (daily or weekly) seem to be driven more by traders (i.e., large institutional investors and hedge funds) trying to make a quick buck on daily market sentiment versus long-term investors like IRA and 401(k) account owners. 

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Today the Labor Department said that first-time claims for unemployment benefits rose last week to the highest level in eight months.  The report raised concerns about tomorrow’s monthly jobs report.  This has resulted in a pull back in stock prices today, May 5, 2011. 

In last week’s commentary I specifically noted that analysts and others believed that commodity prices and specifically, silver, were ready for a correction.  Well, guess what.  Silver is down over 25% since its peak last week and other commodities such as oil, cocoa among others are down from their recent peaks as well. 

Many commodities have had a huge run up over the last year and especially in the last several months.  The majority of the reason was increasing global demand, especially from emerging economies.  However, the Wall Street Journal reported today that a portion of the price run up was due to a huge boom in computerized, high-speed trading.  High-frequency traders now account for 28% of the total volume in the futures markets, which include commodities and currencies.  Read more

The following chart illustrates an interesting contradiction of expectations. The blue 1-year and green 5-year lines represent consumers’ inflation expectations for the time periods noted. The red 5 years forward line represents what TIPS (treasury inflation protected securities) are predicting for inflation in the coming 5 years. The red line illustrates one rough gauge of future inflation expectations via the gap between yields on plain-vanilla Treasury bonds and Treasury inflation-protected securities of the same maturity. TIPS are regularly adjusted for inflation, so this gap in yields, called the break-even inflation rate, shows how much future interest traders are willing to give up for inflation protection, which can be interpreted as the future inflation rate they expect.

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This week I am just going to share some comments from various economic and investment professionals that may give you some additional insight or different perspective regarding the current economic and market conditions. 

“We’re in the early stages of a long-term recovery in global M&A volume.  Historically, you see that the up cycles (last five to eight years), and the down cycles (typically two to three years). We have just come through more than a two-year down cycle, and it is clear to me that we have turned the corner.”

                    Roger Altman, Barron’s, February 8, 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 

“More U.S. stocks are paying dividends that exceed bond yields than any time in at least 15years as profits rise at the fastest pace in two decades.”

                    Bloomberg, September 7, 2010 

“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, MorningstarAdvisor, February18, 2010 

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In the 1980’s U.S. government changed how it calculated “core” inflation by excluding price increases in food and gasoline. Unfortunately, these items are a major part of consumers’ budgets. As such, I and others believe that inflation rate in the U.S. is higher than actually reported. Also, other central banks around the world are raising interest rates to address their specific inflation concerns. Thus, at some point in time the U.S. via the Federal Reserve will need to do the same.

Currently, there is a battle on Capitol Hill regarding raising the U.S.’s debt ceiling (i.e., how much the U.S. government can borrow). Some analysts are concerned that if policymakers continue to just make very short-term extensions or worst of all not allow an extension, then the government would be forced to shut-down. This would result in the U.S. government defaulting on its debt, which many worry would cause tremendous psychology and economic damage to world stock markets and economies.

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Before I start, I want to be clear; this is an economic and not a political commentary.  I am sharing my thoughts and concerns about what is occurring currently and the potential impact on all of us.

I consistently read articles and view videos on a myriad of financial topics.  Much of them relate to institutional and fund managers and the investment strategies they are implementing and their reasoning behind them. 

Even though we are in the midst of an economic recovery, there is a tremendous amount of uncertainty and the looming “government shutdown” only adds to it.  Businesses large and small, as well as consumers, want some certainty when planning for the future.  For example, most likely you’re not going to go out and buy a new car if you know the firm you work for is getting ready to lay off 25% of the workforce.  On the other hand, if you are in a secure position, live within your means and have set money aside, then making such a purchase may be a very prudent and well thought out strategy. 

Unfortunately, there is an 800 lb. gorilla in the room that has been growing and becoming more menacing over the decades, and it is the U.S. government’s deficits and outstanding debt.  It is true that we are a government of the people and for the people and as such, we (all of us) are eventually responsible for this debt one way or another.  Currently, we are seeing the implications of not addressing this issue in Japan, Portugal, Greece, etc.  Left unaddressed, an ever-growing deficit can lead to a country printing more and more of its money to try to overcome the problem in the short-term.  Basic economics state that anytime you create more of something, then it declines in value. 

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Current economic news

• The Labor Department said the unemployment rate fell to 8.8 percent, the lowest since March 2009, as companies added workers at the fastest two-month pace since before the recession began. Approximately 216,000 new jobs were added to the economy last month, offsetting layoffs in local governments.    
• The Dow Jones industrial average closed its best start to the year.  Also, measured against other first quarters, it had its largest point gain since 1998 and the second best on record.  The stock market has been resilient in the face of uncertainty.
• The Institute of Supply Management reported a slight slowing in manufacturing growth during March.  In addition, the Commerce Department delivered more bad, but also expected news on the construction industry.  The government said construction spending fell in February to its lowest level since 1999.

Overall the momentum for the economy and stock market has been on the upside. 

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It appears the consensus opinion is that due to the recent tragedies; Japan’s growth rate will likely fall in the near term, but reconstruction activities should stimulate growth over time.  Here in the U.S. this opinion seems to be taking hold and evidence of this can be seen in recent stock market trends.  As of the close of the market yesterday, the three major U.S. stock indices (Dow Jones Industrials, S&P 500 and NASDAQ) are all above where they stood just prior to the tragedies that took place in Japan on March 11^th of this year.

Along these lines, I saw a presentation on CNBC that illustrated the stock market’s reaction to past nuclear tragedies dating back over 50 years.  Surprising, the average decline of the Dow Jones Industrials average one month after such events was down approximately 1.70%.  As horrible as some of the events appear, the realty is Wall Street and investors very quickly begin to start looking past what has occurred and ahead. 

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St. Patrick’s Day brought some Irish luck to the stock market and a sense of rationality.  The unrest in the Middle East actually took a back seat to the tragedies in Japan.  Please note, I am not downplaying the horrible events that have occurred in Japan.  My point is that it is not the end of world!  During this tragedy, this past Wednesday to be exact, I specifically saw the Dow Jones Industrials decline approximately 1% due to some comments regarding Japan’s nuclear reactor crisis from a European diplomat.  However, within 15 minutes or so, it was reported that these comments were not only old news, but that the individual who made them was not in the position of authority, and he didn’t have adequate knowledge of the situation to speak intelligently about it.  Upon hearing this revised news the market retraced all its losses.  Read more