Outlook - September 2010
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Two Alamo Asset Advisors Representatives
Named FIVE STAR Wealth Managers
This month I am proud to announce that two Alamo Asset Advisors Representatives – Eric Zeitler and Gary Haack – have been awarded the FIVE STAR Wealth Manager(SM) Award as featured in the September 2010 issue of Texas Monthly. Please refer to Texas Monthly’s website for further details.
Mr. Zeitler and Mr. Haack are investment advisor representatives with Alamo Asset Advisors and are duly registered as financial advisors with WFG Investments, Inc., member FINRA & SIPC, our broker/dealer.
We are proud of our financial advisors' recognition as FIVE STAR Wealth Managers(SM) because the award is based on client and peer evaluations. We congratulate these outstanding financial advisors.
Outlook: September 2010
Elections:
We are now roughly 60 days from the mid-term elections. The media indicates that it is a foregone conclusion that we will see an anti-incumbent result. Since the majority of incumbents are Democrats, the inference here is that at the least, there will be fewer Democrats in both the House of Representatives and the Senate; and possibly a shift in power to the Republicans. The amount of the swing in power is anybody’s guess. I have heard it said that if we don’t see enough change in power, particularly in the Senate, that the market will not like the result and we may have a flat or negative market for the remainder of the year.
If, on the other hand, we see a change in the balance of power, the market will like the result and we will see an upwardly trending market heading into the New Year. This predicted sentiment is mostly attributed to the thought that split power - Republican Congress and Democratic President (and vice versa) means nothing gets done and that is a good thing. I find it funny how change affects people. In general, people do not like change. This applies to jobs, neighborhoods, friendships, religion, etc. It seems this aversion to change carries over to politics as well. While change often leads to good things, people generally don’t like change. Therefore, if we do find ourselves with a Republican Congress and a Democratic President, the American public will perceive that there will be no more change and thus feel better about the future. Yes, this will probably lead to a positive market. After all, the market is an indicator of how people feel about the economic future.
I would like to take this opportunity to urge you to get informed, and get out and vote. If you want to check the voting record of your candidates you can check sites such as www.votesmart.org and many others. I recently heard Timothy Geithner indicate that he believes this upcoming mid-term election may be the most important election of his life time. I concur. Get informed and get out and vote.
Economics:
In the June/July edition of Fiscal Notes (a bimonthly publication from the Texas Comptroller of Public Accounts), there is a two page interview with Dr. Michael H. Granof Ernst & Young Professor of Accounting, University of Texas at Austin. I will paraphrase some of Dr. Granof’s comments. The topic of discussion was entitlements, a government program that guarantees benefits to a person by virtue of their belonging to a specific class defined in law. The three largest entitlement programs are: Social Security, Medicare and Medicaid. The article points out that Congress estimates these three programs alone will account for 47% of all federal spending by 2020 and furthermore, the real dollars spent on these programs will double by 2050. Dr. Granof cites a federal government report that states “present trends are unsustainable”. Dr. Granof suggests an easy fix to lack of sustainable funds for Social Security. His suggestion is to simply raise the cap on Social Security tax from the current limit of $106,800 to some number far greater. Dr. Granof says, quite frankly, “there doesn’t seem to be the political will to make the changes needed to save the system”.
With regards to Medicare and Medicaid and the entire health care system, Dr. Granof suggests that it is common practice in medical doctor’s offices for up to 4 people to touch the paperwork necessary. He further concludes that there at least 4 people on the receiving end that must touch the paperwork as well. How can we get costs under control when it takes 8 processors to handle the paperwork generated by one office visit? Dr. Granof points out that in some countries this paperwork is no longer necessary. People are issued cards, much like a debit card. When they receive treatment, the doctor’s office simply enters some information into the computer and swipes the card. The doctor receives payment electronically. This is much more efficient than our labor intensive system!
Dr. Granof tells an apocryphal story that the chairman of one of the big three automobile manufacturers once asked his board, “Who’s our biggest supplier?” Of course, people guessed steel companies, rubber companies, whatever. But no, it was Blue Cross Blue Shield, their health insurer.
Jobs:
In the Saturday, August 14th edition of the San Antonio Express News, the very first column headline read “Economic answers still depend on jobs”. Further down the page was yet another column headed “Feds are fumbling on creating jobs”.
The straight truth is that the Federal Reserve has very little power left to lift the economy out of its rut. Recently, the Fed said they would begin to purchase 10 billion dollars of governmental debt per month. This is an effort to maintain low interest rates and hopefully continue to stimulate the refinance and housing market. This is but a drop in the bucket as the government issues a $1,700,000,000,000.00 in debt this year. That’s 1.7 Trillion for those of you who count zeros. That’s a lot of zeros!
Further, with the upcoming election, Congress doesn’t have an appetite for more stimulus and the consumer is reluctant to spend as well. This is supported by reports from retailers that have been on average, about flat in year over year sales. This is against comps from 2009 that were supposed to be easy to top.
With relation to jobs, if the consumer isn’t spending and the economy remains sluggish, employers simply are not going to put people to work. Employers are cautious and seem to be strengthening their balance sheets and saving their cash. The savings rate of the working public has gone up from less than 2% to over 6% in the past few years.
The corporate savings rate has followed the same trend. Furthermore, I recently read the news that Defense Secretary Bill Gates has recommended to cut at least one military command, reduce funding for contractors by 10%, and slash plans for a new fighter jet. It seems to me that if the government wants to stimulate hiring by offering stimulus programs and increases in unemployment benefits, along with the plethora of other programs included in recently passed $26 billion dollar jobs program, they ought not to contribute to the problem. These cuts will result in lots of jobs lost. I personally would rather see my dollars spent on the military and military support contractors than put into a system wrought with administrative red tape, misappropriations, and frankly, a lot of inefficiencies. A recent Wall Street Journal article points out that in one job stimulus program, the government will pay $30,000 annually for a high skilled manufacturing job program. The problem is that the $30,000 is only slightly higher than the money available through unemployment for these same workers.
I suggest that some folks, given the option to make virtually the same amount of money to stay at home as to come to work, will choose to stay at home and relax.
In yet another publication: The Kiplinger Letter, July 30, 2010, the very first paragraph reads: “Is Washington Serious about the federal debt?” They go on to say: “There’s no chance of tackling the problem this year…”
I could go on but I don’t want to be redundant. Simply stated, economic recovery will not happen until confidence increases and employers are willing to add employees. I don’t believe the government has the answer and only time will solve this problem. Jobs mean more discretionary spending which means more demand, which means more jobs.
Some Good News:
With the economy in the doldrums and the stock market jittery, what are the prospects of inflation, deflation, and/or a double dip? First, I would point out the dramatic improvement in corporate earnings. The ratio of earnings to stock price is at historically favorable levels. Further, history tells us that manufacturing production increases rapidly off the bottom then slows a bit, and then finds a sustainable level. This is the cycle we see playing out before our eyes. If this in fact plays out as expected, we will see employers hiring out of necessity. Simply put, they are running as efficiently as possible and in order to keep up with even modest amounts of growth, must begin to add staff. Over the past two years we saw real asset prices decline - housing prices fell, commodity prices fell, etc.
There are whiffs of positive releases that indicate while prices and values have not begun to increase, they have quit falling. The fact that the Fed is reinvesting its proceeds from the mortgages held on its balance sheet is also a positive sign. As I have stated in previous monthly Outlooks, the Fed balance sheet has grown tremendously over the past two years. How they unwind their balance sheet is key to the recovery. The willingness to reinvest is at least an indication that they will not let the shrinking of their balance sheet inadvertently tighten money supply; at least for now. Additionally, with the 10 year U. S. Treasury Bond yield at the lowest levels since 1979 (www.fidelity.com), the spread between the after-tax earnings yield of the S&P and the 10 year treasury is at historically favorable levels. This causes risk assets (stocks) to be more attractive relative to the non-risk assets (U.S. Treasury bill).
Not so good news:
There are many markets in which investors attempt to make money: stocks, bonds, alternatives, real estate, etc. The two that receive the most headlines are the stock/equity and the bond market. In years past, generally speaking, the bond buyers have been considered the smarter of the two groups. The bond market typically looks at economics, balance sheets, business cycle, etc. and attempts to predict the strength of the issuer over long periods of time such as 15 or 20 years. The stock market tends to look more short term. Recently, there has been a huge flight to safety. The bond market has grown dramatically to include investors that may have never bought a bond in their life. I recall mentioning the bond market to a client back in 2003 and he said; “Bonds? That’s too boring for me. I would rather watch snails race.” Now that client owns a large allocation of bonds.
The combination of the 2008 correction and some perceived good deals in the bond market has brought new investors to the bond table. I conclude that the easy money in the bond market has been made. The secret is out on the bond trade and it is a crowded market now. That is in no way an indication I believe that we don’t have a place for bonds in well designed portfolios. I simply believe that the bond market requires much more diligence than it did even a year ago. A recent headline read: “I cannot conclude that the rush to buy bonds, both corporate and Treasury is nearing its end. But demand in all areas of the bond market is so strong that it seems to be signaling economic fear despite the stock market's summer rally. That can't be good for stocks.” Barrons Getting Technical | MONDAY, AUGUST 9, 2010 Don't Ignore the Bond Market's Worries By MICHAEL KAHN
Conclusions:
I believe that the fact that there are more folks and more inexperienced folks investing in the bond market now, it may prove not to be as good an indicator as it once was. However, it does bear consideration. Many believe we are in the midst of a secular bear market that began when the internet bubble burst. Unlike cyclical bear markets, which can be as brief as a few months, a secular bear typically lasts 10 to 20 years. Although a secular bear market may include a number of declines and rallies, the overall stock market returns during that time are below historical lifetime averages. I believe we are nearing the tail end of a secular bear market that began in 1999.
The real question is not the measure of key economic activity, but rather - are we moving in the right direction? Are we crawling out of the hole or digging it deeper?
While the housing market numbers are dismal, they are better than May 2009. Likewise, on the employment front, the data is very messy. The government layoff of the temporary census workers, Congress failed to extend unemployment insurance, etc. I think as we get into September we will see a bit better news in the employment numbers. Remember, there is an election coming up and the government can and does influence these numbers. The leading indicators, which historically have been good forecasting tools, are telling us employment is headed up. Though that is not yet reflected in payroll numbers, surveys indicate companies are back to hiring at a healthy pace. If this in fact plays out, consumer spending will rise which will help sustain economic expansion.
I think investors need to be exposed to stocks because the overall recovery story is still somewhat intact. On the other hand, you don't want to be too aggressive in stocks either, because chances are things may get worse before they get better. You want to have enough money available so that if we do go lower you can buy.
Alamo Asset Advisors is the operating name for E&C Private Wealth Management, an independently owned Registered Investment Advisor. Securities offered through WFG Investments, Inc. WFG member FINRA and SIP
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