Most people expected the stock market to go down last week due to debt ceiling concerns, but instead it went up. Why? 2 reasons: passage of a 2nd bailout package for Greece & Corp earnings continue to exceed expectations. People have a hard time grasping that although the U.S. economy is sluggish, U.S. corporations are doing remarkably well.
However, this week will be all about the debt ceiling and it will likely come down to the wire. In all likelihood a deal will get done and default will be averted. The question is, will it be a small, short-term deal which will disappoint investors and likely lead to a downgrade of the US credit rating or will it be a big ($4 trillion) deal that everyone wants.
The bigger question is how to prepare your portfolio for either eventuality. Unfortunately, any market timing moves or asset allocation changes have just as much chance of hurting you as helping you. The market is prepared to jump as soon a significant deal is announced and the safe money vehicles are (and have been for a while) tremendously overvalued. So, the right move for now is to sit tight (in your well diversified portfolio) and keep the focus for your long term money on the long term, not the next few weeks. We are also looking to capitalize on any disconnect in valuation (based on panic) should one present itself in the short term.
Posted in Weekly Insight | Posted on 25-07-2011
Congress continues to play a game of chicken with the debt ceiling. This marks the fifth summer in a row of “potential” financial Armageddon. Treasury secretary Geithner went on record this morning saying “Each side has said definitively that default is not an option”, “They’re not going to play around with this”, and “Default is off the Table”.
An important economic and investment theme is the boom in middle class consumers worldwide. Over the next decade, 450 million people are expected to join the middle class in China and India alone. China recently crossed $6,000 in per capita income. This is a key level where you typically see explosive growth in demand for consumer goods. Just as one small example, in 2009 China surpassed the U.S. as the world’s largest market for new cars. The interesting part is that 70 percent of those purchases were made by first time buyers.
Naturally, we can (and do) invest in these emerging markets. However, we also invest in U.S. companies that are well positioned to take advantage of these growth opportunities. Consider the (percentage) of sales that come from outside the U.S. for each of these companies: Apple (56), Texas Instruments (89), Amazon (52), Exxon Mobil (74), IBM (65), Proctor & Gamble (61), General Electric (53). In fact, the average for the 30 companies in the Dow Jones Industrial Average is 46.1 percent, compared to only 35.3 percent as recently as 1998. So the moral of the story is; there are still plenty of places and ways to make money despite a slow growing U.S. economy.
Posted in Uncategorized | Posted on 11-07-2011
In our last blog post about economic indicators, we said that this is a dangerous time to try to time the market. All of the leading economic indicators had been indicating an economic slowdown and the Greek debt crisis and our own Debt Ceiling had been weighing on the market. The reason that it is dangerous to try to time the market (get in and out at just the right time) is because all of the known news and information is already factored into stock prices. Only new information will move the market up or down in the future. The market rallies if the new information is better than expected. The market declines if the new information is worse than expected.
Last week it was better than expected. Specifically, the June ISM manufacturing index came in better than expected and Greece passed a new round of budget cuts and tax increases which paved the way for another bailout. This is significantly better than if Greece had defaulted on their loans. As a result, the U.S. stock market had its best week in 2 years.
Good investing is counter intuitive and we like to say that – “it is always darkest before the dawn”. In other words, just before a breakthrough rally, everything you hear seems hopelessly negative. This is why we say that investors should get out of the “guessing game” and focus on building an investment plan that is prepared for any eventuality.
Posted in Uncategorized | Posted on 05-07-2011