Alamo Asset Advisors Outlook April 2010

The skepticism surrounding this recovery is like nothing I have ever seen. Every time the economy vaults another hurdle, or the stock market sets a new high, a new objection is thrown up in its face. There are lots of excuses; Toyota, housing, weather, etc.
It is true that in most recoveries, by the end of year one, many of these recoveries have seen their best days. I believe the difference this time, for the stock market at least, is that the rise off the bottom had as much to do with the subsidence of fear as it did with improving economics and the improving psyche of investors.

Oddly enough, with unemployment remaining high, consumer spending is approaching its prerecession levels. This is driven primarily by attractive prices (via discounts and rebates), falling mortgage costs, and increased net worth from stock returns and lower debt levels. So far, unemployment has been the only drag on the consumer. Although many believe this will be a “jobless recovery” I believe that we will see unemployment begin to subside in the coming months. This will be a tricky number to get a handle on as the census workers will temporarily improve unemployment numbers.
The good news is that inventories across the board at; retailers and further down the food chain at the manufacturers, are low. If we see any pick-up in demand, then production will step up which means more jobs. That should in turn help the service industry.

While some like to focus on lagging indicators such as unemployment, I prefer to look at leading indicators such as the cost of money, the shape of the yield curve, the direction of credit spreads, the inventory cycle, and monetary and fiscal policy. All of these indicators have continued to point to further improvement for the economy.

Over the longer term, however, there are a number of questions that loom on the horizon.
For one, when will the Fed exit? Will Congress continue to run deficits, and what impact will that have on interest rates, the dollar, and the price of gold? Speaking of the Congress and the deficits…………

It is really tempting to write several pages of rhetoric here and dazzle the reader with a plethora of information. Rather than do that let me simply discuss an issue that I see as a real problem which is entitlement spending and also a word about its cousin non-entitlement spending and how they become linked together. Their name is derived from the way they work: Those who meet eligibility standards are automatically entitled to benefits. Many categories of those benefits automatically increase each year by the rate of inflation. A common example is Social Security. Still other entitlements payouts are determined by an open ended sum of the claims. Some of these are welfare, retirement for federal employees and military personnel, veterans’ benefits, farm price supports, and unemployment benefits.
Entitlement spending has soared from 30% of the federal budget in 1963 (the year I was born) to 52% of the federal budget this year. That is up from $711 billion dollars to about 2 trillion dollars. Just so you get the magnitude of that number here it is: 2,000,000,000,000.00 ………..that’s a WHOLE LOTTA ZEROS! I am not going to knock the entitlement programs because I believe many are good and most are deserved. I can’t testify that I believe the system doesn’t get abused. I won’t even spend time discussing the fact that I find it odd that a farmer will adamantly defend his entitlement of agricultural subsidies and rant and rave about another subsidy, welfare. Here is a link to one explanation of the 2009/2010 budgets. http://en.wikipedia.org/wiki/United_States_federal_budget

Now let’s talk a bit about non-entitlement spending. If you Google it up you will find articles about debt relief programs, government funding to pay your bills, dog parks, snake research, tuition programs, etc., etc. Unfortunately many of these issues are in the new comprehensive Health Reform Act recently passed into law. This is how the current administration views it (for the President’s official White House website go to http://www.whitehouse.gov/Issues/health-Care)

Health reform will make health care more affordable, make health insurers more accountable, expand health coverage to all Americans, and make the health system sustainable, stabilizing family budgets, the Federal budget, and the economy:

It makes insurance more affordable by providing the largest middle class tax cut for health care in history, reducing premium costs for tens of millions of families and small business owners who are priced out of coverage today. This helps 32 million Americans afford health care who do not get it today – and makes coverage more affordable for many more. Under the plan, 95% of Americans will be insured.
It sets up a new competitive health insurance market giving millions of Americans the same choices of insurance that members of Congress will have.
It brings greater accountability to health care by laying out commonsense rules of the road to keep premiums down and prevent insurance industry abuses and denial of care.
It will end discrimination against Americans with pre-existing conditions.
It puts our budget and economy on a more stable path by reducing the deficit by more than $100 billion over the next ten years – and more than $1 trillion over the second decade – by cutting government overspending and reining in waste, fraud and abuse.

Whether or not you agree with the recent passage of the President Obama’s health care package most folks would probably agree that on the surface the first few items above look like pretty good things. Making healthcare more affordable (i.e. cheaper), lowering taxes, keeping premiums low and doing away with pre-existing conditions all sound great. However when you add the final bullet point that somehow all this “puts our budget and economy on a more stable path by reducing the deficit by $100 billion over the next ten years” we may see Washington logic at its finest. In my opinion someone will have to pay for this new program and as usual it will fall to the American tax payer to somehow foot the bill for yet another massive entitlement.

What does this all mean?
All in all, the weight of the evidence from where I am sitting demonstrates that the economic recovery is progressing and may well turn out stronger than many investors expect, and that the bull market in stocks is intact but getting more and more mature. So, I see more opportunities than risk over the intermediate term. In the long run, we must become more active in our national decisions and hold people accountable for how they spend our hard earned money. If not, one of these days we may see a season of financial reckoning that will be a bitter pill to swallow. In the mean time the market seems to have discounted recent events out of Washington as “politics as usual” and is moving forward. We are keeping our trigger finger on the safety, for now, but remain alert to any change that must inevitably come.

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 SIPC.