The Weekly Update 12-30-2011

Headlines you are likely to see in 2012:

Meltdown of Euro banks hits China , economy slows.

U.S. total debt and liabilities hit $116 trillion.

U.S. unemployment remains stubbornly high.

Banks forced to sell foreclosed property to meet liquidity requirements.

Federal Reserve  announces QE-3 to induce economic growth.

Consumer spending stuck in the mud.

Half of homeowners are under water as home values continue down.

Payroll tax reinstated after two month extension, consumers frozen.

Oil back over $150/bbl causing large drop in consumer spending.

This all adds up to "OPPORTUNITY"!  But you have to be ready, willing and able to act.  For those that are, the rewards over the next three to five years should be beyond great.  You also need a plan.  Here is our plan to guide our clients to wins in 2012.

1)  Have no debt where possible.  Debt causes fear and fear never wins!
2)  Know how much you need to run your life each day, i.e. a budget.
3)  List where the money for your budget comes from, i.e. work, investment income, Social Security, etc.
4)  Have an emergency reserve fund in cash. Enough that you can sleep at night.
5)  Dollar cost average in to positive long term investment trends.

What are the positive long term trends?  Here are a few favorites, without the names...which are our "special sauce".  Technology, biotech, health care, energy, precious metals, food/ agriculture.

HAPPY NEW YEAR TO YOU AND THOSE YOU LOVE! 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and may not be invested into directly.

Weekly Update for 12-23-2011

This is a key number......approximately one in three jobs is related to NEW housing.  Therefore, it would be reasonable to conclude that NEW jobs growth is unlikely to occur without an increase in NEW housing sales.  Why NEW housing?  Well, existing houses are already built and require little, if any, new job creation in the economy to be sold.  This is why you keep an eye on NEW home sales.

In addition, this data can be effected by miscalculations.  This week the National Association of Realtors announced they had been double counting existing home sales and therefore reduced 2007 sales by 11%,  2008 by 16%,  2009 by 16%  and 2010 by 15%!!!   This makes one wonder how much NEW home sales have been over estimated.

As if that were not enough weak news,  we are starting to see banks selling homes they have foreclosed on hitting the market.  An incredible 46% of November 2011 home sales were foreclosure related!  This will likely keep a lid on home prices for 2012.

And the kicker is home prices have continued to drop with an additional 3.5% reduction for November 2011!  Perhaps more importantly this data suggests that NEW home sales, which create a ton of jobs, are still finding a bottom and any growth of significance is beyond 2012.   

Fewer applications for unemployment is not the same as job creation.  Without an increase in NEW housing sales NEW job creation will flounder as will consumer spending.  The daisy chain of economic data of present does not seem to jive with the Rosy market outlook of late.

I  would suggest there is a potential for 10% upside in this year end rally, yet the risk on the downside could be 20-30% , or more.  We are likely to know much more about 2011 trends and their effect on 2012 by the end of January 2012.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and may not be invested into directly.

Weekly Update 12-16-2011

It's pretty much all about Europe!  On my weekly post dated 11-18-2011 I clearly detailed the daisy chain of European events and the cause and effect each has on our U.S. Equity markets.  See that posting at  http://www.wealthstratgroup.com/.   

The end of this story is the U.S. market lives or dies with Europe!

If Europe is in a state of flux, we can pretty much expect at least a few more months of directionless drift punctuated with a lot of volatility.  Europe will probably have a recession starting this last quarter, and the U.S. MIGHT have a mild recession, but that is not what is driving the markets right now.  It is fear of a Eurozone meltdown!

If we do see a U.S. equity market drop of significant proportions, it will have started in Europe.  Most of all, it is difficult to timeline the who, what, where, when, why or how contributors

The macroeconomic picture is just terrible, the demographic picture is terrible and we must continue to be realistic in our expectations.  That said, cash dividends do not lie.  I continue to like income investment vehicles.  I will continue to focus on income generation in our client accounts keeping cash on hand to take advantage of good pricing on dips in this market.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and may not be invested into directly.

Weekly Update 12-9-2011

If you want to see a very cool graphic on consumer spending, which is the core of U.S. economic growth, you should go to WWW.WEALTHSTRATGROUP.COM.  Once there, drop down to the tab for WSG Investment Index.  The first graphic is a five year "glance" of consumer spending versus the S&P 500. 

The first graph is interesting, but use your mouse and scroll down to the second graphic.  This clearly shows the "Black Friday" consumer shopping spike and the significant drop off since.  As I have written before, it is VERY important that consumer spending stops dropping, levels off and best case starts to increase as holiday shopping continues.

What's the big deal?  Simply this:  If this chart drops or remains flat Gross Domestic Product (GDP) for the quarter will likely be the same.  Since jobs are driven by economic growth, a flat or decreasing GDP would suggest the same for jobs.  Without the growth of both GDP and jobs we will have yet another round of quantitative easing which further erodes the purchasing power of our dollars, i.e. your standard of living drops!

This chart updates about every two days.  If you watch this second graph you will find it is like having the economic news three or four months in advance..... at your finger tips today!  Pretty cool!!  It is a gift use it wisely!       

Weekly Update 12-2-2012

Jobs creation is the canary in the coal mine. 

The economy will remain slow, sick and not very fun until unemployment comes down to at least 7% and preferably 6% or less.

Non-farm payrolls came out with an increase of 120,000 jobs, which was the result of 140,000 newly created jobs in the private sector offset against a 20,000 reduction in government jobs.

However, the mainline press seems to skip the line I write about so much regarding the birth/death model.  Remember, this is not the birth or death of people looking for jobs.  Instead it is a guess by our government, using a telephone survey of small business, as to the number of new jobs created.  This month the “guess” was +102,000 jobs.

If the birth/death model guesstimate is taken out of the calculation, the actual number of jobs created goes negative.  An interesting point to note is that the birth/death model is only adjusted for accuracy once per year.  For the last few years the pattern has been to release a high birth/death model jobs creation number and adjust later. 

For 2010 that annual adjustment to “the true new jobs data” resulted in the reduction of over 1,000,000 jobs!  Sorry, but to miss by 83,000 jobs a month, for every month of the year, rings of intentionally misleading the data.

Weekly Update 11-25-2011

Is the value of corporate America, as measured by the S&P 500, undervalued?  This is "the question" pretty much all of the time, so let's look at The Wealth Strategies version of the answer.

Every month I update The Seven Signs of a Changing Economy.  Sign #6 is the S&P 500 earnings per share (EPS).  To be most fair in the earnings estimate we use an average of the estimated earnings reported by several research firms.  This estimate is plugged into a business school "rule of thumb" calculation that is quick and easy, THE RULE OF 20.

The Rule Of 20 also takes into account the rate of inflation.  The rate of inflation can be difficult to measure, as I have written about in prior blogs.  The reason is that the BLS inflation data EXCLUDES food and energy, but does INCLUDE housing with a 40% weighting.  Of course food and energy costs are up a lot and housing is down a lot, which skews the inflation number down a lot.  So, we do what all smart people do, we make a reasonable guesstimate!  Our guess is the inflation rate is 6%.

Here is The Rule Of 20 Fair Market Valuation:  you take 20 and subtract the inflation rate of 6% which equals 14.  This becomes the multiplier.  Thus, you would take 14 X the earnings per share estimate for 2012 of $105.00.  14 X $105.00 = S&P 500 Fair Market Value of 1,470, well above today's close of 1,158.67.

On the surface the S&P 500 appears undervalued.  The problem is this.......our economy is slowing again.  Growth was adjusted down this week from 2.5% to 2.00%, no big deal, just a 20% reduction off of an already poor growth number.  Thus, actual earnings could come in at say $85.00 per share.  In addition, investors may become risk averse and be willing to pay only 10 X earnings not the 14X implied by The Rule Of 20.   All of a sudden Fair Market Value of the S&P 500 becomes 850, well below today's close of 1,158.67!

The point is this:  the value of Corporate America is extremelyy sensitive to both earnings and risk.  At this time risk tolerance is fading and earnings could be close behind.  Like many others I do think we could see a year end rally here.  My concern is that it will be a "suckers rally" and the next sell-off could be to surprisingly lower levels.  It is time to be wide awake with your investment positions!!    

Weekly Update 11-18-2011

It has now been nearly one year that I have been writing about the debt issues in Europe.  In our monthly economic update The Seven Signs of a Changing Economy, posted at http://www.wealthstratgroup.com/, I have detailed how inter connected the banks of the world are.  German and French banks hold very large amounts of debt from Greece, Portugal, Italy and Spain.

Where the U.S. banking system comes in is the guarantee they have made to the German and French banks in the event of Greece, Portugal, Italy and //or Spain defaulting.  JP Morgan Chase and Goldman Sachs announced they alone have guaranteed over $5 TRILLION in default guarantees. 

If Greece defaults the first domino falls pushing the next over, etc.  Because of the uncertainty surrounding the change in leadership and cost cutting measures being scoffed at the governments of Italy, Spain and France are having to pay higher interest rates to borrow, which in turn increases their deficits and debt making them bigger and bigger risks.

It appears The European Monetary Union (EMU) is down to two choices.  They can choose to split up, which in itself could be a financial disaster, or they could print money to back stop the lesser quality countries like Greece.

There is just one problem with that.......printing money by the EMU was specifically banned when the EMU was created!  Can that be changed?  At this point there does not seem to be any other way out of the maze!  Unfortunately, the unintended consequences of this could be just as disastrous and ineffective as our QE-1, QE-2, Operation Twist, ....and QE-3 to come!  

 

Weekly Update 11-11-2011

One of The Wealth Strategy Groups Seven Signs of a Changing Economy is JOBS!  This is a key sign of economic change as it tells us a great deal about the economy in two quick observations.  1)  if jobs are expanding it is because businesses are growing, i.e. selling more stuff.  2)  that consumers are spending more.  If they weren't businesses would not be growing and hiring new workers.

The reduction in new claims for unemployment suggests a flicker of growth here.  It is only for the week and we really need to see this number trend down over the four week average claims number, and for an extended period before it has any impact, but it is a flicker.  We will watch this to see if there is a trend developing.

I would suggest this is not a trend.  Why?  The "Birth/Death" calculation portion of this jobs report!  As long time readers know, this is not the birth or death of people, but instead, of businesses created versus closed.  As it turns out this number is just a guess by the stat trackers.  It does get adjusted to a more accurate representation once a year, but as a rule is generally released high for obvious reasons.  Example:  For 2010 the new jobs created stat was reduced by over 1,000,000 jobs!

The key is this; if not for the Birth/Death adjustment in the jobs creation calculation, there would have been a jobs contraction versus the growth reported.  The world equity markets loved the news, but I would suggest caution is warranted and a trend is not yet in place.

Weekly Update for 11-4-2011

The November edition of The Seven Signs of a Changing Economy is a must read!  Go to http://www.weathstratgroup.com/ and tab down to the Signs of Change commentary.  It is free so don't be shy!

Why a "must read"?  Well, in the Weekly Update 10-7-2011, I outlined the number of new jobs that would need to be created to reduce the current unemployment rate of 9.0%,....... it was 9.1% before today's jobs report.  In the recent issue I took a deeper dive in to the data that connects the jobs data to the growth of the economy, or lack there of.

The growth of our economy is measured by the Gross Domestic Product (GDP), or all of the goods and services we as a country produce.  The Federal Reserve just announced a rather large reduction in this estimated growth.  This reduced growth expectation does not paint a pretty outlook for jobs creation.

Since it is difficult to be a good consumer without a job, i.e. income and cosumer spending is 73% of our economic growth, it doesn't take alot of thought to come to the conclusion that we are in for a long slow economic recovery.  Check out the details, it is quick read!

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and may not be invested into directly.

WEEKLY UPDATE FOR 10-28-2011

The growth of the U.S. economy is measured via the Gross Domestic Product (GDP).  This is a measure of all the goods and services produced by our economy.  The first estimate of GDP growth for the first quarter of 2011 (3Q11) has been reported as +2.46%

This is a great improvement considering some of the negative news of late.  In addition, it is significantly better then 1Q11 at +.36% and 2Q11 at +1.34%!

My complaint on the GDP growth number is the inflation rate used by the government to attain this "real", or after inflation, growth number.  The inflation rate used does not include food or energy cost increases, which are both up significantly.  However, it does include housing costs which are down significantly.  These few items artificially push the GDP growth number up.

I continue to suggest inflation is closer to 6%.  If this more realistic inflation rate were used in the GDP growth rate the 3Q11 GDP would be closer to -1.02% versus the reported +2.46%.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and may not be invested into directly.

WEEKLY UPDATE FOR 10-21-2011

As this is written on 10-21-2011 the equity values of Corporate America, as measured by the S&P 500, are almost exactly where they were one year ago.  It has been one of the most volatile trends I have seen in my thirty years as a wealth manager.     

On October 4th, 2011 the S&P 500 opened at 1,097.42.  As I write this the S&P 500 stands at 1,233.93, a 14 day gain of +12.44%.  Yet, none of the problems we all read about have gone away.

I think we are witnessing a "short covering" rally before options hedging expires today.  I will drill into the detail in this months issue of The Seven Signs of a Changing Economy.  In the meantime, this is a significant bounce up in value, but as of now it is not a trend.  If and when the trend develops, up or down, we will start to invest our cash position.   

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and may not be invested into directly.

WEEKLY UPDATE FOR 10-14-2012

WEEKLY UPDATE FOR 10-7-2011

     I have written extensively that our economy must add 200,000 jobs per month.  We need 100,000 jobs per month to replace the 8,000,000 jobs lost in the Great Recession plus an additional 100,000 jobs per month to absorb new entrants to the workforce each month.
     Jobs growth is a by-product of growing the goods and services we create in our economy, i.e. our Gross Domestic Product (GDP).  Our GDP must grow at 3% per year to create the by-product of 100,000 jobs per month and 5% per year to push the current unemployment rate down by just 1%.  Our current annualized GDP growth rate is 2.1%. 
     Do the math and the conclusion is crystal clear:  Until the economy grows at 5% or more per year, the unemployment rate is not going to trend down! 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and may not be invested into directly.

WEEKLY UPDATE FROM 9-30-2011

In the August 2011 issue of The Seven signs of a changing economy, What to look for, Where to find it and what to do when you see trends changing, I wrote that "WE ARE ALREADY IN A RECSEEION"!!  The definition of a recession is two consecutive down quarters of Gross Domestic Product (GDP).  If you look at "real" annualized GDP growth rates (meaning adjusted for inflation) for the last two quarters, they are 1Q11 +.36% and 2Q11 +.98%.  However, the inflation rate used to adjust the real growth was 2.51% for 1Q11 and  2.72% for 2Q11. The key here is the "assumed" inflation rate!  As the BLS does not calculate food or energy in to the inflation rate, but they do include housing via the owners' equivalent rent, it skews the inflation rate lower!!  Real inflation is running at 6%!  Thus, if you recalculate the GDP year to date using 6% inflation you would have GDP for 1Q11 at -2.92% and 2Q11 at -2.51%.  That, by definition, is a recession!!  If you need more proof just look at the price history of the widely accepted indicator of future economic growth, copper.  Since May 2011 copper is down 40%.  Yes, there could be a bounce up in market values as we have had a big sell off, but the data is the data and it does not lie.  WE ARE ALREADY IN A RECESSION.  Know that and use it to your best advantage!! 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and may not be invested into directly.