TIME Magazine Article on the US Economy

Really interesting TIME magazine article here

Some highlights:

-IF AMERICA'S ECONOMIC LANDSCAPE seems suddenly alien and hostile to many citizens, there is good reason: they have never seen anything like it. Nothing in memory has prepared consumers for such turbulent, epochal change, the sort of upheaval that happens once in 50 years. That may explain why so many voter polls, taken as the economy shudders toward the November election, reveal such ragged emotional edges, so much fear and misgiving. Even the economists do not have a name for the present condition, though one has described it as "suspended animation" and "never-never land."

-In a normal rebound, Americans would be witnessing a flurry of hiring, new investment and lending, and buoyant growth. But the U.S. economy remains almost comatose a full year and a half after the recession officially ended. Unemployment is still high; real wages are declining.

-The current slump already ranks as the longest period of sustained weakness since the Great Depression.

-That was the last time the economy staggered under as many "structural" burdens, as opposed to the familiar "cyclical" problems that create temporary recessions once or twice a decade. The structural faults, many of them legacies of the 1980s, represent once-in-a-lifetime dislocations that will take years to work out. Among them: the job drought, the debt hangover, the defense-industry contraction, the savings and loan collapse, the real estate depression, the health-care cost explosion and the runawayfederal deficit. "This is a sick economy that won't respond to traditional remedies," said Norman Robertson, chief economist at Pittsburgh's Mellon Bank. "There's going to be a lot of trauma before it's over."

-America's structural burdens have hit home most profoundly in terms of jobs. The U.S. workplace is "in a profound, historic state of turmoil that for millions of individuals is approaching panic," according to labor consultant Dan Lacey, publisher of the newsletter Workplace Trends. Official statistics fail to reveal the extent of the pain.

 

-A comprehensive tally would include workers who are employed well below their skill level, those who cannot find more than a part-time job, people earning poverty-level wages, workers who have been jobless for more than four weeks at a time and all those who have grown discouraged and quit looking.

 

-One major obstacle to efficiency remains: a runaway U.S. health-care system, whose costs are rising at the rate of more than 9% a year and today stand at $2,500 a person, more than twice the level of most of the world's industrialized economies.

 

-…needs time to work itself out: the debt hangover. The initial stages were painful, wiping out both borrowers and lenders. Bank regulators clamped down on lenders, while borrowers either swore off the credit habit or were deemed bad risks. The result was a credit crunch that has severely hurt businesses, especially small ones. Among the 8 million such companies in the U.S., failures are running at the rate of 240 a day. One of the faces behind the numbers is Joseph Burton, whose plight embodies many of the woes now afflicting small business.

 

-The consumer-debt hangover will be far easier to solve than the government's. …the government is limited in how much it can stimulate the downtrodden economy with the usual recession cure of a quick jolt of spending. Yet a growing number of economists are contending that shrinking the federal deficit is a worthy goal that should be temporarily suspended until the economy is back on track. While the national debt will hamper the economy over the long run, its net effects on growth over the short run are insignificant compared with such problems as unemployment, declining wages and worker dislocation.

 

Most interesting thing about this article is that it is from September 28, 1992.

 

Turning More Bearish

I mentioned earlier this week that my first point of concern on the S&P 500 was 1060:  today we took that out with impunity.  In doing more analysis on the S&P and other areas of the market, which I will discuss more this weekend, I am leaning more toward the bearish camp than I originally thought taking out 1060 would have me be.  At this point, suffice it to say that you need to have a defensive plan and make sure you run those plays.

Down Friday - Down Monday

According to Stock Trader's Almanac, a down Friday followed by a Monday has a tendency to be a precursor to a move down.  Today's lower close followed a lower close on Friday.  While I can't say if this will play out negatively nor have I made any major allocation changes, I have moved to a more hedged approach in most models.

Interesting Article on 401(k)'s

A recent Miami Herald article quoted Fidelity data citing that the average 401(k) account balance today is $66,900.  Also noted in the article was that "in 1983, 62 percent of workers had only company-funded pensions, while 12 percent had 401(k)s, the Center for Retirement Research at Boston College said. In 2007, those numbers were 17 percent and 63 percent, respectively."  "The life expectancy of a 65-year-old U.S. male is 82, and 85 for a 65-year-old female, according to the Social Security Administration."

Those still in the accumulation phase of their careers should have a game plan for those next 10, 15, 20 years until retirement to ensure you have enough to live that life you want.  Unfortunately the plan, mentioned in the article, being proposed in Congress to make mandatory annuities in retirement plans is not going to provide anything other than sub-par returns which equates to a mediocre life in retirement at best.  Having a plan to take advantage of the up periods and avoiding losing big chunks of assets in the down periods is the way to have a significant nest egg for retirement.

Summer Doldrums Continue

After this past week we have back to back weekly losses in the equities markets.   If you want to blame something, the big disappointment this week was the spike in claims for unemployment benefits.

On the other hand, we saw bonds continue to rally.  Even though all the experts keep saying interest rates, which move in the inverse to bond prices, can not go any lower, they do as people bid up the price of bonds.

While we have seen some indications of strength in some areas, in general we are moderately cautious on equities at the moment, especially domestic equities.  We are entering the weakest period of the year historically:  the months of September and October.  Keep this in mind when reviewing your equity allocations.

 After the "death-cross" earlier this summer, the S&P 500 briefly reclaimed its 200 day MA only to fall back below the 200 and 50 day MA.  Watch the 1060 area for support, if that is given the 1000 - 1010 range is next.  After that...???

Up? or Down?

According to CNBC the stock market could go up or down by the end of the year.  Wow, I'm glad they told me that.

As CNBC says:

FAST - that's probably true

ACCURATE - well, it will go up or it will go down so one of those will be accurate

ACTIONABLE - someone please tell me how you can create an actionable plan based on this

You have 90% of the investing public out there listening to CNBC giving you this kind of "actionable" information.  No wonder so many people really don't have a plan.  Because we cannot predict the future and tell where the market will be in 4 months, we have a documented, systematic plan at Rivah Capital that is dynamic in that it will adjust to market conditions.  

I have stated a number of times that I do believe we are 10 years into a 13 - 17 year secular bear market but that does not make me a permabear.  There will be times when we want to be in stocks and times we want to be out and our strategy allows us to do that.  And if we are on the wrong side, we cut our losses and get on the right side. 

Ask yourselves, do you have a plan?

--
Jason M. Martin, CFA

Stock Market Myths

A pretty good list from the WSJ

1 "This is a good time to invest in the stock market."

Really? Ask your broker when he warned clients that it was a bad time to invest. October 2007? February 2000? A broken watch tells the right time twice a day, but that's no reason to wear one. Or as someone once said, asking a broker if this is a good time to invest in the stock market is like asking a barber if you need a haircut. "Certainly, sir -- step this way!"

2 "Stocks on average make you about 10% a year."

Stop right there. This is based on some past history -- stretching back to the 1800s -- and it's full of holes.

About three of those percentage points were only from inflation. The other 7% may not be reliable either. The data from the 19th century are suspect; the global picture from the 20th century is complex. Experts suggest 5% may be more typical. And stocks only produce average returns if you buy them at average valuations. If you buy them when they're expensive, you do a lot worse.

3 "Our economists are forecasting..."

Hold it. Ask your broker if the firm's economist predicted the most recent recession -- and if so, when.

The record for economic forecasts is not impressive. Even into 2008 many economists were still denying that a recession was on the way. The usual shtick is to predict "a slowdown, but not a recession." That way they have an escape clause, no matter what happens. Warren Buffett once said forecasters made fortune tellers look good.

4 "Investing in the stock market lets you participate in the growth of the economy."

Tell that to the Japanese. Since 1989 their economy has grown by more than a quarter, but the stock market is down more than three quarters. Or tell that to anyone who invested in Wall Street a decade ago. And such instances aren't as rare as you've been told. In 1969, the U.S. gross domestic product was about $1 trillion, and the Dow Jones Industrial Average was at about 1000. Thirteen years later, the U.S. economy had grown to $3.3 trillion. The Dow? About 1000.

5 "If you want to earn higher returns, you have to take more risk."

This must come as a surprise to Mr. Buffett, who prefers investing in boring companies and boring industries. Over the last quarter century, the FactSet Research utilities index has even outperformed the exciting, "risky" Nasdaq Composite index. The only way to earn higher returns is to buy stocks cheap in relation to their future cash flows. As for "risk," your broker probably thinks that's "volatility," which typically just means price ups and downs. But you and your Aunt Sally know that risk is really the possibility of losing principal.

6 "The market's really cheap right now. The P/E is only about 13."

The widely quoted price/earnings (PE) ratio, which compares share prices to annual after-tax earnings, can be misleading. That's because earnings are so volatile -- they're elevated in a boom, and depressed in a bust.

Ask your broker about other valuation metrics, like the dividend yield, which looks at the dividends you get for each dollar of investment; or the cyclically adjusted PE ratio, which compares share prices to earnings over the past 10 years; or "Tobin's q," which compares share prices to the actual replacement cost of company assets. No metric is perfect, but these three have good track records. Right now all three say the stock market's pretty expensive, not cheap.

7 "You can't time the market."

This hoary old chestnut keeps the clients fully invested. Certainly it's a fool's errand to try to catch the market's twists and turns. But that doesn't mean you have to suspend judgment about overall valuations.

If you invest in shares when they're cheap compared to cash flows and assets -- typically this happens when everyone else is gloomy -- you will usually do very well.

If you invest when shares are very expensive -- such as when everyone else is absurdly bullish -- you will probably do badly.

8 "We recommend a diversified portfolio of mutual funds."

If your broker means you should diversify across things like cash, bonds, stocks, alternative strategies, commodities and precious metals, then that's good advice.

But too many brokers mean mutual funds with different names and "styles" like large-cap value, small-cap growth, midcap blend, international small-cap value, and so on. These are marketing gimmicks. There is, for example, no such thing as "midcap blend." These funds are typically 100% invested all the time, and all in stocks. In this global economy even "international" offers less diversification than it did, because everything's getting tied together.

9 "This is a stock picker's market."

What? Every market seems to be defined as a "stock picker's market," yet for most people the lion's share of investment returns -- for good or ill -- has typically come from the asset classes (see No. 8, above) they've chosen rather than the individual investments. And even if this does turn out to be a stock picker's market, what makes you think your broker is the stock picker in question?

10 "Stocks outperform over the long term."

Define the long term? If you can be down for 10 or more years, exactly how much help is that? As John Maynard Keynes, the economist, once said: "In the long run we are all dead."

Full article