The Weekly Update 2-24-2012

"Ring Around The Rosy"
By Mother Goose

Ring around the rosy,
Pocket full of posy,
Ashes! Ashes!
We all fall down!

The Rosy of the equity markets since October 2011 has been the Reserve Banks of the world.  Our own Federal Reserve has continued to keep interest rates artificially low via "Operation Twist".  When combined with Quantitative Easing #1 & #2 these actions place close to $3 Trillion dollars of liquidity in to the monetary system.

With the most recent bailout for Greece other currencies have been printed and forced in to the monetary system around the world by:


The Federal Reserve: via the International Monetary Fund (IMF)
The Bank of Japan
The Peoples Bank of China
The European Central Bank
The Bank of England

The European Central bank injected the equivalent of $645 BILLION dollars and The Bank of England $125 BILLION.  Now those numbers will start a pretty darn good party!!

 Now let the banking system leverage it 20-50X, or more, invest the total in "risk" assets like world equity markets, commodities, bonds, etc. and the party goes from pretty darn good to very very fine, in a hurry!!

As I have written for the last several months, I think this will end in tears.  However, until that point....week's, months or years...we will Ring around the rosy, Pocket full of posy.  Ultimately and if explained logically, each person older than age ten, understands you don't solve a world debt problem issuing more debt!!  That will just create ASHES!!  ASHES!!  We all fall down!

Until the point that our Target Violation Exit Strategy tells us to step aside we will join in.  But as written in last week's post, without the concentration of any one investment that rhymes with apple.

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.

The Weekly Update 2-17-2012

There are two things that humans have a difficult time looking at.  Number one is the sun and number two is the truth!

For this example I am going to compare the sun to Apple Inc.  If you follow a few of the select companies in corporate America, like Apple, you noticed the spike up in the share price last week.  It was enough to add a cool $75 billion in market capitalization!

Since the market averages, like the S&P 500, Nasdaq Composite Index and the Nasdaq 100 Index are market capitalization weighted, Apple's huge market cap skews the entire index up or down, depending on which way in moves on any given day.   Ned Davis Research reported that Apple now represents 15% of the entire Nasdaq 100 Index!  In my opinion, that is a disproportionate allocation.

In essence, this means money managers are unlikely to outperform a comparable index, like the S&P 500 without owning Apple!   The shares of Apple may or may not be over priced by the market place, but if they increase in price and you don't own it, you are likely in the underperform the comparative category.  On the other hand if you don't own Apple and it goes down you are likely to outperform a comparable index.

I have seen this before.  In the 1980's it was nearly impossible to outperform an international index, like the EAFE without owning Japan.  We thought Japan was overvalued and owned the EAFE- ex Japan.  We were about one year early on the collapse of the Japanese market, so for one year we underperformed versus the  EAFE and then looked really smart after that market dropped.  Which was nice!

The TRUTH is that it will be hard to make normal comparisons of performance in 2012 unless the weighting of Apple is reduced in the various indexes.  As an independent investment advisor, my TRUTH is that we will be measured versus a data point that would require me to take on potential market and volatility risk to beat.  Only time will tell if and when this was the prudent thing to do.

So, the Apple market price valuation is a bit hard to look at, just like the sun.  This is especially true for people like me who found there was no bid and were no buyers for Apple on October 19th, 1987! 

The TRUTH is that it will be hard to explain underperformance versus an index for 2012 if you choose not to concentrate a portfolio in this one company.

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.

The Weekly Update 2-10-2012

As I have written for several months, JOBS are the key to the economic turnaround.

Like many others I want to believe in Santa Claus but reality prevents that belief.  Instead, we believers settle for "the spirit" of the season.  So, when I saw last Friday's (2-3-2012) unemployment report I wanted to believe, but just like believing in Santa reality prevents that belief!

The jobs report headline was the unemployment rate fell to 8.3%.  This is now a trend as it is the fifth monthly reduction in this key stat.  The number of jobs created grew to 243,000!  The number of people unemployed dropped from 13.1 million to 12.8 million.  Impressive, if only you could believe.

The reality:  the headlines are guilty of lying by omission.  In fact The Bureau of Labor Statistics (BLS) reduced the size of the workforce by 1.2 million people.  In their report the BLS sites the adjustment as a result of the 2010 census which over calculated the number of people in the workforce for the last ten years.  However, the fact that tells "the truth" remains that the labor force participation rate has dropped from 65.7% to 63.7% in the last 2.5 years since the recession "officially" ended.  The difference in the two numbers represents the 4.8 million people who have given up on finding a job.

Conclusion:  without the adjustment from questionable census detail, meaning using December 2011 numbers, the unemployment rate would have increased .2% to 8.7% versus the headlines yelling about how great a .2% drop to 8.3% is.

Like the reality that forces each of us to confront the fact that there is no Santa Claus, we must understand the reality of what massaging the jobs data can do to distort the truth.  Just like Santa, for now we will just have to believe in "the spirit" of a jobs based turn around because the data does not support the headlines.

I am interested in your comments!  Feel welcome to contact me via e-mail or directly at 1.800.800.6364.

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.