Download commentary_economic_..

Is This 1999 All Over Again?
There is a time for everything, and a season for every activity. Ecclesiastes 3:1.
In a recent issue of Investment News, it said financial advisors report that a growing
number of formerly wary clients are becoming dangerously aggressive. These advisors
worry about their clients making more ill-timed bets in the stock market.
No one really knows what is in store for the US economic and stock market future.
Nonetheless, there are some warning signs—and I want to bring them to your attention.
If you feel like it’s time to review your investment strategy, I would be happy to discuss
this with you.
Now in what follows are pieces of information that guide my cautious outlook.
Douglass Kass, president of Seabreeze Partners Management, and occasional guest on the
Larry Kudlow show (CNBC weekday evenings at 6 pm) was one of the first to correctly
predict a rise in the horrible stock market back in early March. Not long ago he opined
that we may have seen the top of the stock market now for this year.
One of my actionable timing services that I subscribed to on your behalf is Stock Market
Timing (SMT). They produce a good, weekly newsletter. Their commentary gives pause
for consideration, too.
In their current short-term outlook they say, when evaluating the short-term technical
condition, it is tough to bet against the resiliency of the market in September/October.
In all likelihood, the market will head higher for the next 3 months.
SMT also believes the top of the market will occur in December, 2009 at which point it
will roll over and decline, just as it has in other similar periods in the past in the 1970s
and in the 1930s. They believe the market will gradually decline for the next few years—
until about 2012. After this secular bear-market bottom, SMT believes the market will be
poised for a long-term rise for a decade or more.
What is behind all of this? Well, many, many considerations. I’d like to give you a sense
of a few issues to take note—in three broad categories:
1. US economy
2. US companies
3. Geo-political matters
The US economy is likely to be out of its latest recession—one that was declared to have
begun in December, 2007. Gross Domestic Product (GDP)—which represents all the
goods and services produced in the US—is likely to show an upturn soon. This is good.
US companies posted strong profits for the second quarter—as reported in July. This was
one factor which confounded market timing efforts—because in early July we anticipated
that the market was going to take it on the chin during the 3rd quarter. As some
investment pundits noted, the analysts who follow these companies have never gotten
their predictions so wrong.
Those profits have come from below-the-line cost savings. Much of that came from
trimming of staff. This is something that is commonly done during recessions. Despite
this marked improvement in productivity—and hence, favorable profits which were
encouraging to investors—such cost trimming cannot be replicated forever.
Therefore, eventually profits (which are a major engine for stock market growth) must
come from above-the-line revenues. Here is the rub: About 70% of GDP comes from
consumer spending. There are two major factors working against consumer spending at
present—both of which could lead to the predicted slowdown and decline in the stock
market:
1. The unemployment rate is near 10% and will not decline anytime soon.
2. American’s who are notoriously poor savers are now saving instead of
spending—projected to be about 8% of their income.
There has emerged a grave geo-political risk: It is confirmed that Iran has a secret facility
in Qom (although the US government has known about this for years) which is working
towards development of nuclear weapons.
In his United Nations speech, Israeli Prime Minister Benjamin Netanyahu provided the
moral authority for his nation’s continued existence, despite the repeated declarations by
Iran’s President Mahmoud Ahmadinejad that Israel should be annihilated.
Once the Irani nuclear facility was made public, French President Nicolas Sarkosy and
British Prime Ministry Gordon Brown were particularly forceful and blunt about Iran’s
need to come clean within 3 months or face significant consequences.
Israel may not stand by quietly if the international community once again fails to take
action against Iran. It’s possible that within 3 to 9 months, Israel could conduct a secret
bombing mission to take out those nuclear production facilities.
What would that mean? Within our context, it could mean oil prices would double to
quadruple overnight. Higher gas prices in the range of $4-8 per gallon could follow.
The fragile US economy might go back into recession. And with that, investors who
disdain uncertainty would become quite fearful, and we could experience a rapid reversal
in the stock market.