Download DECEMBER MARKET COMMENTARY By Tom Crow January 10

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DECEMBER MARKET COMMENTARY
By Tom Crow
January 10, 2011
Index
Dow Industrials
S&P 500
Nasdaq
Month
End
11,578
1,258
2,653
Month
5.2%
6.5%
6.2%
Gain (Loss) by Period
Most Recent
Year-toTrailing Twelve
Quarter
Date
Months
7.3%
11.0%
11.0%
10.2%
12.8%
12.8%
12.0%
16.9%
16.9%
December turned out to be a fairly strong month despite the dwindling volume in the last few days as traders deserted
Wall Street for extended holiday vacations. All three indices more than made up for November’s weakness and ended up
with respectable gains for the year.
Looking back a little further, the Dow finished 2010 less than 1% above where it finished 1999. The S&P 500 was still
down 14% and the Nasdaq was down almost 35% over the same period, and those numbers are not adjusted for
inflation. The “lost decade” for stocks that was hoped to have ended in 2009 tacked on another year.
Corporate earnings are improving which is driving the price-to-earnings ratios of their stocks lower and making them look
attractive even though the market has been moving higher for many months. Unfortunately, many of them are holding
their cash, opting even to borrow money at current low rates rather than spend it while they wait for the economy to
improve.
The markets launched into fairly substantial corrections in early 2009 and 2010. At this point things appear a bit
overbought, which could lead to the same thing this year, but volatility is lower than it was the past two Januaries so we’ll
have to watch very closely. Friday’s close marked the sixth week in a row that the Dow and the S&P were positive.
One market in which we’re fairly heavily invested but don’t talk about much is the municipal bond market. There is no
shortage of speculation in the financial press as to how it might be affected by cities and states facing huge shortfalls.
One camp says default is imminent. The other says fears are overblown and this is a buying opportunity. I tend to agree
with the optimists on this one.
The feds did not increase taxes, and even made a few temporary cuts in payroll taxes. This may allow financially
strapped cities and states a little wiggle room to increase their tax rates so the cuts might not have to be quite so deep.
This is preferable to federal bailouts in my opinion, for which the money would have to be borrowed.
Don’t misunderstand this as me advocating higher taxes…raising taxes too high or for too long never works, and I have
plenty of history on my side to support that argument, but it’s pretty clear to me that this mess will not get fixed without a
little pain felt by everyone. “Fair” cuts both ways, doesn’t it?
Instability and fears of default on debt in the European markets continues to worry investors as Portugal is back in the
headlines. News like this is shaking confidence in government debt all over the world and still has the bond bears fearing
runaway interest rates in the not-too-distant future. I don’t know what other governments might do, but our Fed can’t allow
rates to go too high as long as we carry our current debt burden.
December’s employment numbers came in at 103,000; well below the consensus estimates of 175,000 and the optimistic
“whisper numbers” closer to 200,000. The unemployment rate dropped from 9.8 to 9.4 as more folks left the ranks of the
unemployed, i.e., their benefits ran out or they gave up looking for jobs, than joined them.
Again, the economy needs to be creating between 125,000-150,000 jobs each month just to keep up with normal, first
time job seekers…high-school and college grads and immigrants looking for jobs. Add to that the number of state, local
and federal employees who will be looking for work due to layoffs and cutbacks and we’re still in a deep hole.
Some analysts are saying these numbers look good and are indicative of a strengthening economic recovery, but there
are longer-term consequences that will have to be addressed. The number of out-of-work-and-out-of-benefit folks is
growing, putting additional pressure on the charities that support them at a time when donations are down. I still get the
feeling these analysts are trying to convince themselves things are getting better when actually they’re just getting worse
a little slower than they were.
The 111th Congress was put out to pasture last week, but before they were retired, they managed to rack up more new
government debt than the first 100 congresses combined according to the US Treasury. In just two, short years, they
saddled every living American with an additional $10,430 in deficit spending.
Yes…I’m still beating the debt drum…but I’m beginning to feel like perhaps it’s beating me. Just about every analysts and
advisor is using words like “unsustainable” to describe our current spending habits, but we just keep spending ourselves
deeper and deeper into debt, with no plan of how to get out.
Remember, the deficit commissions’ proposals only balance the budget. They don’t begin to address the $14 trillion in
debt that already exists. That is not going to go away all by itself, and by the way…it’s not free money. We are paying
more in interest on the national debt than we are in federal pensions at this point…over $200 billion a year!
The cities and states get it. They can’t print money, so they’re making the necessary, albeit painful cuts.
As a senator in 2006 Barack Obama
spoke against, and voted against
increasing the debt ceiling saying
those who wanted it increased were
irresponsible. His administration is
now pressuring congress to raise the
debt ceiling and saying those who
oppose it are irresponsible.
Bankruptcy really is not an option as
defaulting on our debt would have
absolutely disastrous consequences,
but is raising the debt ceiling the only
answer? Can we not even consider
reigning in spending so we don’t hit
it? The cuts will be painful, just as
they are to the states, cities, and
everyone in the private sector but I
honestly think we have sufficient data
to show we will never be able to
spend our way out of this mess and
into prosperity.
Is congress (still the opposite of progress) going to continue to ignore the obvious and operate under the assumption that
they can somehow reduce debt while they continue deficit spending? I have to believe that as individuals the majority of
our elected officials would never try to implement such a reckless and dangerous strategy with their personal and family
finances. Is there some reverse-Gestalt process that occurs upon entering those hallowed halls that makes the whole
stupider than the intelligence of the individual parts?
Either this 112th congress starts taking some meaningful steps towards fixing this mess or I’m predicting a 2012 election
that’s every bit as bloody as the last one, if not worse; and this time, the republicans in charge of the house will be feeling
the pain every bit as much as the democrats who control the senate.
I’m not expecting problems to be solved and all debt eradicated by 2012. It took us a long time to get this far in the hole
and it’s going to take a long time to get out, but if they don’t figure it out this year and next how to get things headed in the
right direction, they deserve everything they get come election time…as do we for sending them back term after term and
not demanding they accomplish something.
All welfare and entitlement programs started out as great and generous ideas, but when you’re broke, you don’t have a
dime to put in the Salvation Army bucket, and in my opinion you certainly don’t pick the pocket of the stranger next to you
and take his money to do it. I could probably open a whole new can of worms with that comment, but I won’t. They’d
freeze to death anyway.
Stay warm!