Download Issues Influencing the Market

Second Quarter 2010 Securities Market Commentary
The second quarter proved less productive for investors than the first quarter’s S & P 500’s return of
4.87%. The second quarter returned a -11.86% after experiencing a decline of 15.32% from its peak of
1217.28 on April 23rd, 2010 to a low of 1030.71 on June 30th, 2010. The year-to-date return for the S&P
500 is -7.57% as of June 30th, 2010. The second quarter brought the markets much to digest; continued
concern about Greece’s debt crisis, BP’s oil disaster in the Gulf and renewed anti-Wall Street sentiment
based on the Goldman Sachs’s “interview” by congress to mention just a few. As mentioned last quarter,
10% declines in an index such as the S&P 500 are considered healthy and in fact needed to keep
evaluations reasonable. This “re-evaluation” allows earnings to catch up with prices the market has
attached to shares, often before the earnings are there to justify such optimism.
Risk Management
As you can see by the activity in your portfolios, the models continue to reallocate assets to
investments that may have greater potential, based on their ranking from a mathematical scoring
process. In a declining market, bonds and money market investments are often identified by the models
as having stronger price patterns, indicating money flowing into those investment categories. As the
markets gain more confidence, investments in stocks or commodities are often identified as having a
more appealing price behavior. In an environment that offers no dominate price trends, the models
tend to diversify into a broad range of asset categories including stocks, bonds, commodities and even
real estate. This diversification allows at least part of the portfolio some exposure to the next emerging
trend. Once the trend becomes better defined, the models may overweight the stronger asset
categories allowing for greater performance.
Technical Market Overview
The 200 day moving average, as the name indicates, is the average closing prices of the S&P 500 from
the past 200 days. If the average is rising (the average is higher than the previous day), it is considered a
positive long-term indicator. However, if the average is lower than the previous average price, the
market is considered to be in a negative or declining long-term trend. As of 3/31/2010, the 200 day
average of the S&P 500 index was 984.33 and by 6/30/2010 it had increased to 1112.10. It is important
to note that this indicator showed a lower average price on 6/29/2010 than the prior day, indicating a
reversal in the trend. Adversely, it is not unusual to see several reversals both up and down at crossover
points such as the one we are experiencing now. If the 200 day moving average continues to decline,
this leads one to believe the market may be vulnerable to further downward pressure.
Issues Influencing the Market
Global Economic Weakness
In respect to Greece, Spain, Portugal, Ireland, and China, why do we care about their financial woes?
There are several reasons. The most widely recognized is that of the United States being the financial
“back stop” for the international entity’s dealing with these financial issues. The World Bank and the
International Monetary Fund are both heavily dependent on the U. S. for economic support. The U. S. is
the largest, single donor to the World Bank at almost 13% followed closely by the UK at over 12%. Again,
the U. S. has the largest contribution quota at 16.74% of the total International Monetary Fund. It is
these commitments to the two major institutions that most often task the U.S. with bailing out the
sovereign debt of any country in need. So as these countries require capital, it has potentially a very
direct impact on our economy based on the commitments made by our government.
Secondly, many of the countries in financial distress are trading partners, suppliers to U. S. corporations
or customers of U. S. based companies. With the extraordinary communication capabilities offered via
the internet and the most extensive transportation network in history, the world has become one
market for goods and services. As the globe continues to “shrink,” the world’s economy is likely to
become more interdependent than ever before. This trend appears to be accelerating, no longer
allowing someone else’s problems to be theirs alone; rather the world now seems to prosper or suffer
together.
Attitude toward Business
With BP’s debacle in the Gulf and Goldman Sachs’s questionable investment banking practices called
into question, I cannot remember a time when corporate America has been demonized more by the
press or by any administration. Clearly, both of these companies have made questionable choices and
under-taken courses of action that deserve scrutiny. Secondly, if any illegal acts have been committed,
they should pay the consequences for any such acts. However, to paint an entire industry in the way
Wall St. has been characterized is unfair, untrue and unreasonable. Not all Wall St. firms are dedicated
to financially damaging their clients in an effort to achieve their own goals at any cost. It would serve
those well who insist on the unrelenting verbal assault on Wall St. to remember that the standard of
living we all enjoy as Americans was in large part made possible by the very firms it is now so
fashionable to bash. Without the ability to raise capital, businesses cannot even be formed, let alone
have the financial resources needed to grow and prosper. With the vast majority of Americans having
some exposure to the markets through 401K’s, IRA’s or personal investment accounts, it seems
counterproductive if not damaging, to continually make disparaging statements about companies that
many of the investing public owns shares in directly or through mutual funds. If the “bad actors “are
held accountable as they should be, then allow the well managed honest companies to receive the
credit they deserve. I believe a more balanced, realistic attitude from the media as well as our elected
leaders toward corporate America would serve investors and our economy well.
Consumer Confidence
Although confidence, as measured by the University Of Michigan Consumer Sentiment Index (CSI), rose
only modestly in June to 76.0 from 73.6 in May and 70.8 last June, the gain was enough to push the
Sentiment Index to its highest level since January 2008. The cumulative gain from the low of 55.3 in
November 2008 has restored only half of the decline from the January 2007 peak of 96.9. This indicator
shows modest improvement in the consumer’s outlook for the future. As you can see, this indicator
remains well below its pre-crash high, revealing how much work remains to be done in an effort to
restore the consumers’ confidence for the future.
Regulation, Oversight and Taxes
While the new push for regulating the markets is trying to evaluate many curial factors that are not yet
well defined, this uncertainty often takes a toll on the markets until all the “rules” are clarified. The
proposed oversight for investment banks is quite fluid and under pressure from the politicians to ensure
that there is ample oversight to avoid a 2008-like meltdown. It is not widely reported that the regulatory
tools and laws needed to avoid such crisis have been in existence for quite some time, long before the
2008 meltdown; they just weren’t being utilized. To avoid taking responsibility for such a regulatory
breakdown, the fix must be to create even more laws and regulations to insure that such an event never
occurs again. The delicate balance between overreaching regulation and allowing the industry you are
overseeing to function efficiently, is a difficult one to say the least. However, the banks in this case,
must have the ability to develop products that serve the public as well as benefit their shareholders;
while not taking undo risk. This legislative balancing act continues at the time of this righting.
The Government’s insatiable appetite for more revenue is most often satisfied by raising taxes. This
strategy has an inverse effect of draining off capital that could have been used by the private sector to
create jobs. With the creation of a new job, it is important to realize we have also created a new tax
payer. With the expansion of the number of people paying taxes it lessens the amount needed from
each payer to meet the government’s demands. However, due to the immediate need for revenue to
satisfy the government’s overspending and not allowing the time needed to reap the benefits from
more tax payers added, the government is forced to raise taxes when the taxpayer can least afford it.
Perhaps the biggest threat to the markets advancing is the expiration of the Bush tax cuts at the end of
this year in which the increased load on the economy could prove difficult enough, causing a double dip
recession.
Federal Deficit
Last quarter I wrote: “The federal deficit has finally become a concern to the average American citizen.
Our challenge is to make it as much of a concern to politicians in charge of federal spending.” Now the
deficit of not only our country but the debt of the entire industrialized world has become an issue for
the global economy. As our economy struggles to regain a reasonable growth rate, the Government
must be very careful how it unwinds its economic support. Economic historians believe a major factor
causing the prolonged depression in the late 20’s was the “tight money policy” combined with higher
taxes to repay the federal debt at that time. The lack of capital essentially starved the economy,
disallowing job creation and business expansion. Fortunately, the Federal Reserve Bank’s Chairman Ben
Bernanke is one of those historians. Bernanke has spoken repeatedly about the need to balance the
budget and reduce our debt while being mindful not to disrupt the fragile recovery. The key will be the
gradual reduction in federal support when the economy is healthy enough to continue its recovery on its
own. It is somewhat comforting to see the Fed. Chairman testify before Congress as to the importance
of greater fiscal restraint. It is the American citizen’s responsibility to enforce this new, more fiscally
prudent agenda at the voting box as we choose those who we entrust with our nation’s financial
wellbeing.
Unemployment
The unemployment rate remains to be the single most important economic indicator. While the federal
number is not released until 7/2/2010 after the completion of this letter, all indications are that as much
as another 100,000 jobs were lost last month. The weaker-than-expected job report falls into a trend
that was seen throughout the quarter and helped lead to a difficult three month stretch for the market.
Investors have been routinely disappointed by economic data that showed the economy's recovery is
slow and choppy. By the end of 2009, the proportion of the unemployed who had been jobless for 27
weeks or longer was the highest on record, with data back to 1948. We cannot have genuine economic
recovery without job creation and this is not achieved by expanding the size of government. One way is
by creating an environment where businesses are comfortable and not concerned about unnecessary
regulation that rarely achieves its stated goal. In short, real private-sector jobs can be created, when
companies can trust that the rules for business won’t change and variables like healthcare cost and Cap
& Trade-like legislation are off the table or at least well defined.
Summary
The easy money related to the rebound that started in 2009 appears to have come to an end. The
investor sentiment related to the true economic condition of the U. S. and World Markets is becoming
more realistic and less optimistic. Citizens most often relate a thriving or even stable economy with job
stability, meaning low unemployment and a high currency exchange rate. The recent government
“takeovers” in various areas of the consumer’s lifestyle have made the average citizen very uneasy
about the future, causing an even more volatile market. With the future of tax structures, health care
expenses, inventory needs and consumer demand being uncertain, the current state is a tough time for
a company to invest into human capital that would be needed should the economy pick up. In addition,
it’s much easier to continue focusing on cuts rather than planning for growth opportunities. However,
the good news at present is that opportunities will continue to abound for individuals and companies
that have been fiscally responsible. Companies that currently have funds available for risk acquisitions
that would have been 30 to 50 percent more expensive prior to 2008 are now financially able to take on
these undervalued assets. Each citizen will need to re-evaluate their debt-to-income ratio in order to
offset the growing debt the government is putting onto each American. We expect that, as in past
recessions, there will be new leaders that emerge providing compelling stories, accompanied by
sustainable growth patterns and we expect this is where the portfolios will lead us. As always, the
models gravitate towards sectors of strength and growth. We may see those sectors as bonds and
money market, or conversely they could be gold and precious metals. Whichever end of the spectrum
they might be we will move forward as always, through any market condition, with a positive and
dynamic outlook. In conclusion, we can all feel constructive and optimistic about the months ahead, no
matter what the economic status might be.
Disclaimer Notice
No investment strategy can guarantee profits or protection from losses as securities are subject to
market volatility. The analysis, ratings and/or recommendations made by the Edgetech Analytics, LLC
computer models do not provide, imply or otherwise constitute a guarantee of performance. No
guarantee is offered by Edgetech Analytics, LLC regarding the accuracy, market predictive powers,
suitability or profitability (either expressed or implied) of any information provided. Indices are
unmanaged and direct investments in them are not possible. Actual investment performance of any
trading strategy may frequently be materially different than the pursued results.
Sources
Bureau of Labor Statistics http://www.bls.gov/
World Bank Christopher Swann in Washington at [email protected]
International Monetary Fund http://www.imf.org/external/np/exr/facts/quotas.htm
Michigan CSI http://www.economicpopulist.org/content/consumer-confidence-nosedives-june-2010down-98-points