The Toilet Paper Caper

We don’t like to talk about it, but most of us use toilet paper. It’s one of those things you don’t want running out. We take TP for granted. For years I found the inner cardboard fit nicely on the TP holder. Then I started to notice that the paper seemed to wiggle a bit in the holder. Then it began to seem that the holder had shrunk. I realized that what was happening is that the size of the cardboard holder of the paper was becoming larger. By golly, when I looked, I found the number of sheets of paper on a roll had been reduced. To the eye, the roll seemed unchanged, but it was changed. I noticed this in passing and I also began to notice that the orange juice container was the same size with less product, the coffee bag looked the same but had fewer ounces of coffee, etc. Yesterday, however, the toilet paper caper moved to a new level. While up until now the paper fit exactly into its space, suddenly there was a lot more room around it. Not only was the cardboard roll larger, the width of the roll had shrunk! The next step will be to introduce a new, higher priced, larger roll of toilet paper, that will look like the old roll with a marketing strategy telling me it is Newer, Bigger, Better and overall less expensive! Why is this relevant? As commodity prices have increased, businesses find themselves in a tight spot. They want to keep their profit margins up but they don’t want to raise prices for fear that consumers will not use their products. With the price of oil rising, the cost of gas is increasing, and therefore the cost of transportation is higher, too. We are seeing how insidious inflation can be, even when overall it does not appear to be a problem. Consumer income has not been growing, but consumers are forced to pay more for staples, leaving less discretionary income. If this continues, it could have a negative impact on the growth of the U.S. The key to growth is more money in the hands of consumers for discretionary spending. Ed Mallon

Odd Things - March 31, 2011

Sometimes I see things that strike me as odd. Today is opening day for baseball. Doesn’t seem to make sense, to me, that baseball would begin when the weather, in most of the country, is not warm and sunny. On March 10th, the front page of the Wall Street Journal had two articles next to each other. First was “Discovery’s Last Flight Caps Era in Space Exploration” and next to it “Deficit Proposal Picks Up New Allies.” Seems that only yesterday we were “investing” in space exploration to bring about new innovation here on earth, and oddly, now it’s gone. Recent reaction to continuing drops in job losses and increases in job creation has been mixed. At 10 a.m. this morning, the “Jobs Report” article on MSN Money noted that the DJIA was down because of the report. By the time the “Strong Jobs Report” (same report) was issued by MSN Money at 12:26 p.m., the DJIA was up +87, also noted because of the jobs report. As I was looking at this new posting it was 2:30 p.m. and the DJIA was down again. Seemed odd to me and I wondered if the same report would be renamed again based on how the DJIA finished the day; and it was, to "Lack Luster Jobs Report." So here is the thing: the economy appears to be improving, but what is really happening with the stock market? I like to follow the S&P 500; seems to me that more stocks in the index make it a better gauge of what is happening. On December 31, 2011, the S&P 500 closed at 1257.64. On March 16, 2011, after going up and down for many weeks, it stood at 1256.88 (a slight loss). Now we are at the end of the first quarter of 2011 and the S&P 500 is up about 5.6% since March 16th. It all seems odd to me, but I am happy it is back up. Ed Mallon

Japan 3-11

I couldn’t help thinking, as I watched television this past Friday, that the date was reminiscent of 9-11. The pictures coming from Japan showed devastation and ruin that I knew would result in more than the 40 to 60 deaths that were being discussed at the time. To me, it was in some ways like watching the twin towers coming down all over again. This time, it was Mother Nature reminding us of how precious life is and how delicate the balance under which we all live. We have friends who have loved ones in Japan, we know of military personnel stationed there, and then there are all the people we don’t know who are scared and worried. The emotional impact is chilling! This destruction will have an economic impact for some time to come. Today I noted that the price of oil was receding, stock prices were dropping, and there was a sense that there was not enough information yet to determine what was really happening. This is the point where attitude and fortitude come into play. As bad as it is, we human beings gather ourselves back up, reorganize and move forward. This will happen in Japan. As difficult as it is, they will rebuild. We will help them rebuild. Ed Mallon

A Breath of Fresh Air

For quite some time, we have been waiting for the weekly new unemployment filings to go below 400,000. Even more important is to see the four-week average go below 400,000. For the week ending February 26th, the Labor Department reported the weekly new filings were 368,000 and the four-week average is 388,000. In addition, continuing jobless claims--people who have received benefits for more than a week--fell by 59,000 to 3.77 million. These are all positives on the job front. What we really want to see, however, is new job creation! Well, this too has been a positive. To absorb new workers entering the workforce, the economy needs to create about 100,000 jobs, on average, every month. Since November of 2010, the average is 120,000! The momentum is picking up, with 192,000 jobs added in February. The doom and gloom folks will point out that the number of people employed is still 7.5 million below the end of 2007, but I believe the trend is your friend and in this case the trend is going in the right direction. Hooray! Ed Mallon

Is a Pullback Imminent?

The stock market has been remarkable since the early part of this year. It has risen, with a few pauses, but the direction has certainly been positive. I think we are in a bull market, and still in the first leg of that bull market. The difficulty I am having is that such an uninterrupted expansion with fewer sellers and less demand means that if, for some reason, more sellers begin to show up, demand will likely not support current prices. Since January 29th, when the NYSE 10-Day Moving Average of volume was 4.9 billion, it has dropped about 20% to yesterday, February 17th, when it reached 4.1 billion. Volume should be expanding to support a stock market rally. As I have said previously, I believe we will see a correction with a buying opportunity. Ed Mallon

Market Correction

When I did my “Outlook for 2011” paper, I did so thinking that a stock market correction would occur sometime during January. I therefore did not want to make any equity changes until that happened. As I waited, the technical factors of the stock market appeared to grow weaker, with the number of stocks above their 10-day and 30-day moving averages dropping. Short term demand also seemed to be dropping. Both of these are signs that the market was becoming more selective and was losing momentum. It was clear that a shortfall of earnings or a change in world affairs could have a marked impact on the market. The unrest in the Middle East may be just the thing to instigate the market correction. I believe that the correction could be in the area of 5% to 7% from the S&P 500 current high of 1299. I would not sell equity investments already in place (because I could be wrong) but I have been unwilling to add to equity positions for our clients until this occurs. I still believe that, barring a major incident or a reversal of economic news, we are in a bull market that will progress much farther. Ed Mallon

Positive Vibes!

With a new year approaching, it is time to reflect briefly on this past year and look ahead. Let’s first consider bonds and how they reacted during the year. With a drive to reduce interest rates by the Federal Reserve Board (FRB), we saw short-term interest rates approach 0% and longer-term rates drop to new 30-year lows, thereby increasing the value of bonds. This situation dominated for most of the year until the FRB decided that they wanted to see a higher rate of inflation and began dumping money into the economy in November. This has resulted in interest rates rising and the value of bonds decreasing in value. Assuming that the FRB continues in this vein, moving more fixed investments into shorter duration positions--where the risk of inflation is lower but the returns are also lower--will be necessary. This will be good news to stock prices that should advance in 2011, as investors look for higher returns and leave bonds to invest in stocks. Stocks also have the attribute of tending to move, over time, up with inflation. In 2010, stocks made progress in price increases, but with a great deal of volatility. If we look at the gain in the S&P 500 from the close on January 4, 2010 until the close on December 20th, we see the index move from 1144.98 to 1247.08, or about 6.3% gain for the year. Not great, but not bad either. Stomaching what was happening during the year was difficult. With the S&P falling from the beginning of the year to 1022.58 at the close on June 28, or a drop of about 10.7%, some investors found it difficult to hang in during such a large correction! Currently, the stock market has been moving up and is likely overbought (prices too high). A small correction in the range of perhaps 2% is likely over the short run, but we are in a bull market that still appears to have a long way to go. In summary, it appears that investing in bonds with maturities that go out more than 5 years could be a bad idea in 2011 if inflation increases, but investing in stocks will likely be a good idea, assuming that we do not have any major domestic or international incidents. Many investors became frightened during 2007 through 2009 and went very conservative with their portfolios. During 2009 and again in 2010, the conservative investor did well, as bonds reached new 30 year lows. It appears that this will not be the case in 2011 as the bonds may lose value or achieve small gains. Investors need to review their willingness to take risks and consider reevaluating their risk profiles. I would like to take this opportunity to wish you a healthy and invigorating New Year! Ed Mallon