Market Minute – March 10, 2013

/in /by

It is nice to see the winter finally start to come to a close, with daylight savings restored this morning, the foot of new snow in my front yard notwithstanding. Less pleasant that the onset of spring is the reaction to Friday’s unemployment figures.  I fear that we are seeing a repeat of the market myopia that so widely devastated portfolios in the last financial crisis.

By all means, the report on Friday – a gain of 236,000 jobs for the month of February – is a welcome sign.  Construction spending and hiring continue to increase at a vigorous pace, and the medical industry leads the hiring trend.  But the figures still reflect a troubled situation.

The unemployment rate reflects only those who are looking for jobs; another 130,000 people chose to leave the workforce, hastening the decline in the unemployment rate.  And an equally important measure is the long-term unemployed, which increased to 4.8 million people, or 40% of those reported as unemployed.  Furthermore, the gains in February are tempered by a downward revision of 38,000 fewer jobs in January, which was already a weak month.

We need 150,000 new jobs a month to maintain stable employment given population growth – a level we have yet to maintain during this recovery.  During the financial crisis, we lost over 7 million jobs, which we have not begun to restore, factoring in population growth since then.  Certainly the momentum is in the right direction, but it has been five years since the recession began, and we are only beginning the process of restoring lost jobs and incomes.

When we factor in mediocre economic growth of around 2%, the impact of the sequester cuts, and the consumption-dampening effects of higher gas prices combined with a payroll tax increase, we can see that we are still skating on extremely thin ice in the short-term.

Yet, the stock market has reached an all-time high.

The disconnect is a result of the Fed’s $85 billion monthly monetization program.  By “printing” money in such vast quantities at a sustained rate, they are able to inflate the various markets beyond values that reflect the true economic risks.  Yes, companies are profitable and cash is abundant on their balance sheets, but the prospects for strong continued growth are dubious at best.  We need some impressive magic to make it all work in a way to support these values.  Anything short of magic will be another collapse.

As with every other asset bubble human emotion reigns – with a healthy dose of marketing.  The financial media loves to fixate on stock prices and stock highs.  You cannot walk 50 feet in today’s cities without seeing some headline, quote or other reminder of the stock market and the related hype.  With the strong propensity for people to forget past events and fixate on the immediate market news, the bubble has plenty of fuel to grow to dangerous proportions.

How we proceed from here is with caution.  What we need to remember is that volatility will remain, and until we fix the more pressing issues these market highs are not likely to persist.  As a reminder, our investment strategy reflects these risks through a broad asset allocation that enables growth from stocks as well as several other asset classes.  The success of this long term approach will fluctuate with market distortions, but it is a steady perspective that favors stable growth over extreme highs and lows.

Regards,

David B. Matias, CPA

Managing Principal

Rising Fears of Recession

/in /by

Image via CrunchBase

Hi Folks,

Click Here for a recent article by the New York Times about the current economic conditions and the possibility of another recession.


Regards,

David

Market Snapshot – Volatility is Back

/in /by

Market Snapshot – August 5, 2011

Volatility is Back

Not unlike the summer of 2010 (or the summer of 2009, or 2008, or 2007), we have seen the markets go back onto the roller coaster.  While the reasons are disconcerting, and the prognosis is still uncertain, we are well positioned to ride through the volatility.  In a brief snapshot of events this week:

 

  • The broader U.S. market lost all of the gains for the year and slipped into negative territory.  When this “slip” occurred on Thursday, it helped to fuel an extensive sell-off late in the day, resulting in nearly a 5% drop by closing.
  • Bond prices have mostly held steady.  Investment grade bonds are up, while high-yield markets have shown a little slippage.  Nothing to cause a disruption in either direction, except for the temporary spike in Treasury prices and the commensurate drop in rates to extreme lows.
  • Gold screams ahead – a traditional safe haven.
  • Individual stock prices have shown more volatility than the index.  Basic names such as Dow are getting hammered, while Apple has retained its short-term gains based on their recent earnings release.
  • The S&P is trading at 12-times projected earnings, well below the historical mean of 16x.

 

The roots of these events, however, are not so obvious:

 

  • The debt-ceiling debate, while resolved for the time being, did serious damage to the national psyche.
  • The debt reduction measures, incorporated into the debt-ceiling legislation, will reduce our overall productions by 1-2% per year based on estimates.
  • GDP growth in the first half of the year was anemic (<1%).
  • All combined there is a real possibility that we could enter a recession again.

 

Through all this, we have not heard from the Federal Reserve Bank.  While Congress is unable to discuss any stimulus given the political climate, the Fed is free to act independently.  Most likely, if there is a serious threat of a double-dip recession they will again act to inflate asset prices through a variation of QE2.

Our portfolios have fared well in this environment.  We took several steps over the past three weeks to hedge against this situation: raising cash, lowering equities and selling potentially volatile bonds.  All of these steps are important to buffer against losses and now we are well positioned to increase positions at some very attractive prices.  The challenge, of course, is to find the bargains that will retain long-term value.

Our work continues.  But in the interim, I want to emphasize that we have stayed ahead of this correction while keeping options open to us.

 

Please write or call with questions.

 

Regards,

 

David

 

David B. Matias, CPA

Managing Pricipal

Vodia Capital

Unemployment for February – Good News, Bad News

/0 Comments/in /by

This morning, the government released statistics for the unemployment situation in February – a strong jobs growth of 192,000 new jobs across both the private sector and the public sector with a drop in the unemployment level to 8.9%  Yet, the market responded as if this was bad news, with a drop of 150 points on the Dow as of mid-afternoon.  Let us add a little color:

In fact, the jobs growth was exactly what economists had predicted while simultaneously predicting a steady unemployment figure.  The drop in the latter, in fact, is more driven by folks leaving the job market completely.  In effect, just giving up and either learning a new role in life or entering very early retirement  The jobs growth over the past few months is not enough to both repair the economy and accommodate folks just entering the work force for the first time.  We are slipping in this task – not gaining ground.

The second bit of news is the wage growth figure, which remained flat for February at $22.87/hour.  That is bad news, because of increases in the real costs of living.  While core inflation may be tame, things like oil and gasoline are going up quickly with the events in the Middle East.  This is very bad news – especially for folks on fixed wages or in retirement.  If there isn’t a correction in energy prices, the economy could be at risk of stalling.

So again we have to wait and see if there really is a strong recovery taking hold, if we’re just treading water, or if we are on the edge of another slide downwards.  It wouldn’t be a hard slide like 2008, but it would be enough to truly discourage folks.

Regards,

David B. Matias, CPA
Managing Principal

Financial Crisis – Three Years and Counting

/1 Comment/in /by
Wall Street Sign. Author: Ramy Majouji

Image via Wikipedia

It has been three years since this financial crisis began.  Yet if you follow the news, all the discussion has been around the two-year anniversary of the Lehman collapse and how the world has done since then.  If we are to truly understand the nature of this economic malaise, we have to remember its roots – in the subprime crisis of 2007.  That was the year in which the credit markets froze.  From a financial viewpoint the credit markets rule the economy – not the stock market, as you might come to believe if you watch too much network television. Without banks lending to banks, to companies or to people you are not going to be able to grow an economy, much less buy that house you were interested in.

The damage that was caused by the sub-prime crisis and credit market freeze cannot be underestimated.  It dragged the US economy into the worst recession on record.  It pushed millions out of work, permanently.  It pushed two investment banks to the verge of failure – Bear Stearns and Merrill Lynch.  It pushed another into bankruptcy – Lehman Brothers.  That bankruptcy seized the global asset markets – all of them.

So then is it a surprise that three years into this crisis, and a trillion dollars of government stimulus money, that we’re still suffering the effects?  Absolutely not.  And if it is another two years until we have true stability in the global asset markets, it would not surprise me.

David B. Matias

Ben Bernanke ready to act if Economy weakens further

/0 Comments/in /by

This week was full of economic data releases as well as some comments about the economy from the Federal Reserve Chairman, Ben Bernanke. To start the week, we had existing and new home sales fall well short of the 5 million annual run rate that was estimated.  The July 2010 sales came in at a dismal 4.11 million annual run rate, a 26% decline from the month before. Durable goods orders also missed estimates for the month of July.  It had been a bright spot in the economy but only grew 0.3% versus the estimate of 3.0%. Thursday’s initial jobless claims fell to 473k from last week’s revised 504k, although encouraging, the 4-week moving average edged up to 487k, the highest since December 2009.

Last month Q2 2010 GDP was reported at an annualized rate of 2.4%, today it was revised down to 1.6%, beating more recent estimates of 1.4%.  The markets seemed to cheer the beat since all the other economic reports were misses.  At 10:00Am today the Federal Reserve committee met in Jackson Hole, Wyoming to discuss the state of the economy. With growth being too slow and unemployment being too high, Bernanke indicated that they will provide additional monetary accommodations to make sure the economy recovers.  This sent the market up about 1% and is so far holding onto those gains.  We’ll have to wait and see what’s in store next week to determine if the market will continue its brief rally. Next week’s economic indicators include Personal Income and Spending, Chicago Purchasing Manager Index, Vehicle Sales, and the most significant of all, Change in Non-farm payrolls & the August Unemployment rate. Any surprises in the payroll report will surely increase volatility and consumer sentiment.

Economic data shows economy still struggling

/1 Comment/in /by

Economic reports due out this week include new and existing housing starts, durable goods orders, and the revised estimate to Q2 2010 GDP.  Housing sales will  show about a 12% drop from June 2010 as the housing credits are now fully out of the system and natural market forces are coming back into play.  The annual unit sales rate will come in close to 5 million, the lowest since March 2009. One bright spot remaining in the economy is durable goods which should show an increase of 3% compared to June. Friday’s GDP report will show the economy grew at a  1.4% annual pace, much less than the 2.4% that was estimated just a month ago. This new information is probably the reason why Federal Reserve Chairman Ben Bernanke has stated that they will reinvest payments on their mortgage holdings back into long-term treasuries.

The economy continues to show both strengths and weaknesses, which is probably why the VIX is still elevated and the treasury yields are so low right now. People are confused and the conflicting data isn’t helping to ease their fears of another drop in the market. Uncertainty in the economy is still a large factor and until there is clarity, there will be more volatility.