Another Blah Month-End Closing!

Yes, once again, today was another month-end downer for the stock markets. But wait, it was an up month! I sometimes wonder why we bother looking at the indexes and the stock market at all. The level of volatility seems extreme and belies the value of the stocks that are being traded. In any event, today the S&P 500 dropped 2.47%, which is hard to take but is likely a reaction to the exuberance on Thursday when the market took off on the “good news” from Europe. I always think, “Do everything in moderation.” On the good side, we saw the S&P 500 rise 10.8% for the month of October. When you get your monthly statements, they should feel warm and fuzzy compared to the end of September, when they just seemed totally fuzzy! Earnings results are coming in better than I expected and the economy is certainly doing better. In the first quarter, GDP was up 0.5%. In the second quarter it increased to 1.3%. With this past August being a total wipeout , I was hoping to see the 1.3% revisited in the third quarter. Instead, GDP was up 2.5%. That is amazing! Manufacturing in September was up a stunning 4% and an economy that was expected to add no new jobs added 103,000. Unless all of this is bogus, the U.S. economy continues to get stronger. Not a bad place to be at this time! Ed Mallon

Change in Direction

Early Tuesday morning, September 20th I saw a fundamental change in the stock market. What precipitated my real concern was the combination of changing dynamics coming from Asia, the intransigence of world governments and the inversion of supply and demand indicators. In the case of the change in Asia, it was reported that freight and air shipment capacity was being underutilized. The meaning of this is that fewer goods are being manufactured and shipped. This in turn means that the dynamo, that has been Asia, has scaled down dramatically in a very short period of time. At the same time, world leaders, attempting to deal with the debt crisis in Europe, seem stalled. US lawmakers seem unable or unwilling to compromise in a manner that would relieve the strain on consumer confidence that has been in free-fall since late July. Finally, on the technical side, the graph of supply and demand crossed over with demand for stocks dropping while supply increased considerably. This sent a caution signal that would indicate the need to lighten up on stocks and return the funds to more liquid and stable investments. With manufacturing slowing, consumer confidence reduced, government paralysis and technical factors pointing in the wrong direction it seems action is warranted. Although the markets made a turnaround in the latter part of last week and today, the indications for the balance of the year do not provide much solace. When comparing where we were at the end of May and where we are today the forward-looking perspective is that there is a need to be more conservative with funds. This is not anything like I saw in October of 2007, when we moved decidedly to a defensive position, but rather is an attempt to conserve funds to allay investors’ concerns with the turmoil in their statements that have occurred during the past three months. I still believe better days are coming but for now we are in a down draft. Ed Mallon

Stepping up the Market

Since the latter part of July, we have witnessed volatile markets. On many days, the DJIA has changed as much as 300 points. Yesterday (September 12) was not nearly as bad as some days, but as an example, the low point of the DJIA the market was down 167 points from the day before, but closed up 69 points, a change of 236 points. More meaningfully, the market showed a 98% down day at one point yesterday and closed as a 54% up day. If you didn’t tune in until the end of the day, you might have thought “good day in the market.” It is difficult to be a long term investor if you are looking at day to day or even month to month results. If you add to this the media hyping everything that is negative, you can become very depressed. The question that you need to ask is always “is the market getting better or worse?” To answer that question, you need to first look at the ongoing pattern. Many small investors got out of the market on August 8th. Thus far, this has been the bottom point in the current market seesaw. Since then, we have witnessed increasingly higher lows each time the market has dropped. When you see negatives on your account statement for July followed by August, it’s easy to feel bad. If you bailed on August 8th, you should feel sick, because you did exactly the wrong thing at the wrong time. In a Wall Street Journal article on Monday, September 12th, they reported on a study that was done by Prof. Richard Sylla, a financial historian at New York University. Prof. Sylla studied market behavior from 1790 to 2000. “By analyzing patterns detected years ago with two colleagues, he accurately predicted in 2000 the decade of overall declines that haunted investors.” At the request of the Wall Street Journal, Prof. Sylla has made a new forecast. “Better days lie ahead,” he says. If past market patterns hold true, as they did over the last decade, stocks should bottom out during the next few years and begin a recovery. He is not talking about a week, a month or a year, but a decade. Here is the best part. Prof. Sylla says, the DJIA could climb by 84% by the end of 2020 and the S&P could climb by 99% from last Friday’s close. He is expecting a 6.5%, inflation adjusted, real rate of return over the next decade. Is he correct? I don’t know about his numbers, but his attitude of taking the long view is what is so important. Ed Mallon

Is This Time Different?

With the recent volatility in the stock markets, I have had several people ask me if this time is different. The easy answer is yes! The reality of the past 13 trading days is that the markets have had an unusually high level of volatility. For example, during the past 13 trading days, we have had 9 days during which the DJIA has moved up or down 400 or more points. Looking at the NYSE operation companies, we have had 9 days during which the percentage of stocks up or down in a given day is 90% (I don’t believe that has ever happened before). As I look at what is happening, it is clear that there are two groups that account for most of this volatility. Small investors have panicked and programmed trading, where computers make the decision to buy and sell based on algorithms. In the first case, small investors, many of whom were burned during the 2008-2009 meltdown of the markets, panicked. “Once burned, twice shy” my mother used to say. By running for the fire exit, many of these individuals, having left in fear, will certainly maintain whatever losses they incurred up to the point of exit and will have a difficult time deciding when to get back in. It has been interesting to see where they are going with their money. Most have gone to money market funds, which are paying nothing, or to gold, which is at its highest in history. As I see gold moving up, I keep thinking of the housing bubble of 2005 when many people said you can’t lose money on gold--oops, I mean real estate. If this volatility continues, we may decide to take some of our equity funds and reduce positions, but to give this a knee jerk reaction is a mistake. I, along with many of you, lived through the dark times of 1974 when markets plummeted. After President Nixon’s resignation in August and his pardon by President Ford in October, the US appeared to be doomed! All of that was forgotten in December as the markets soared. In 1992, we were in an economic downturn, the Japanese were taking over the world and President Bush was kicked out of office because of a dismal economy. Look at what happened between then and 1995. Often, when things seem to be the most dire, Americans bounce back. I believe such will be the case this time, but it sure tries one’s patience as you live through it! I still believe that next year at this time will be better than this year. At this point, this does not appear to be like 2008-2009 but we are preparing to do what’s necessary if the direction does change. Ed Mallon

Panic, Carnage and the Stock Market

Yesterday, the S&P fell by 6.6% and has fallen by 16.77% since July 22nd! Yipes! The overall reason appears to be a lack of leadership in Washington, resulting in fear in this country and around the world, that the United States has run amok. The result is PANIC! Not a great response. As some of my clients gathered, this just might be a great time to buy. But, is that wise? Let’s go back to a famous point in time when panic set in, with the result that the S&P 500 plunged almost 32%. It was the great panic of 1987, and the country was a mess! So what happened? Let me give you two examples using the S&P 500. Your worst-case scenario would have been to invest your money on August 31, 1987. By December 1, 1987 you would have lost 31.97%. If you had hung on until May 31, 1991, however, less than four years later, you would have had a compound rate of return of 7.96%, which is not too shabby. Suppose instead you saw the carnage and invested at the beginning of December 1987 and left your money in until May 31, 1991. You would have done spectacularly well! Your investment would have grown by a compound rate of 19.15%. The real point of this is that you cannot time the stock market. You must make predictions of where things are going in the future, believe in what you are doing and invest accordingly. I believe we are going through a major bump in the road. But in looking at American businesses, I feel they are strong and are undervalued, and that a year from now our investments will be looking good. For now, you need to brace yourself and accept that this too shall pass. Ed Mallon

Stumbling and Bumbling

While it will take some time to determine what the fallout will be in total, for now it appears that Washington's decision to kick the can down the road is having a negative impact on the economy. What has become abundantly clear is that we have a lack of leadership in all parts of the government. The S&P 500 had its worst month in over a year in July. As stocks and bonds suffered losses,US and foreign investors lost confidence. One Congressional representative put it very well: "The Greatest Generation passed the ball to us and we dropped it." Looking forward, the reactions of voters in 2012 will be interesting. For now, both small and large businesses have been left in limbo, which usually results in no business expansion. Consumers also hunkered down with a reported drop in consumer spending for June. The GDP report for the second quarter of 2011 came out showing an annualized growth rate of 1.3%, while the anticipated rate was 1.8%. This shortfall, along with lower revised figures for the first quarter from 1.3% down to 0.4%, shows an economy almost at a stall. The bottom line may well be higher unemployment and less job creation. Investors may see a loss of value for the time being. The good news is that most people have short memories and, as the press moves on to other events, we are likely to see a rebound in stocks and bonds, because by most indicators they are underpriced. We will wait and see. Ed Mallon

What's your Perspective?

Last night I was in a restaurant in Denver, and the server, whom I've know for years, told me that on the previous night an "Economist" patron had said the economy was "doomed" for at least the next eight years. This had made my server very upset. I asked: "how old was this person and where did they come from?" The first answer was that the person was late thirties, maybe forty. The second answer was that the patron was from Southern Florida. Everyone sees the world though his or her own perspective. For someone aged forty, this latest downturn is likely the first that they have had to deal with personally. They have no real personal comparison for measuring this downturn against some other downturn. The second is that the person came from Southern Florida, where housing prices are still dropping, job recovery is abysmal and no end of bad times seems to be in sight. It's no wonder this patron was seeing the dark side of the economy. I asked my server if things were better now than in November of 2008, and were they better than a year ago? The answer to both questions was that things were in fact better. The next question I asked was "do you think things will be better a year from now or worse?" After some thought, the answer was "things will be better!" Perhaps too often we are brought down by the negative thoughts of others without addressing our own perspective on what is happening. A year ago, there was virtually no job growth. Now we are creating about 200,000 jobs a month. A year ago, home sales were almost nonexistent and housing prices were falling all over the country. Now in many places home sales are happening and prices are stabilizing. A year ago, the consumer was barely spending and now spending has picked up. Much of the cash stimulus that the Federal Reserve has pumped into the economy will likely not have its full impact till the end of the third quarter through fourth quarter of this year. I think we as Americans want instant gratification and would like to see the economy back the way it was in early 2007. We have a way to go to beat down unemployment and to see the housing market back to "normal", but we seem to be moving in the right direction, though slowly. At least that is my perspective. Ed Mallon