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2010Oct10 Week In Review

Economy:

 
 
What's "scary" is that an 84 year old man still fails to realize that what he's afraid of are the problems he perpetuated. At least he has moved the solution to a reduction in entitlement programs and reduced government spending. The problem will not be solved by more borrowing to continue the unrealistic and unsustainable commitments made by generations of politicians seeking their own re-election.
 
The #1 factor in global markets today is the US Dollar. That could change next month or next year. China’s currency, for one, is tied to the US Dollar. When we devalue ours, the linkage causes devaluation elsewhere. Congress may complain about China, but responsible fiscal policy in Washington would be more effective than brow beating legislation. The ghost of Smoot-Hawley has found its way back into the House which passed tariff legislation against China. Will they never learn?
 
China made a significant statement by purchasing Greek bonds bearing 11% and telling the European Central Bank that it is expected to be the guarantor. Did the Fed and Administration get the message? China may not be all that interested in more US Treasuries at abysmally low rates, especially if repayment becomes uncertain.
 
Health care:
 
The new health care law has abandoned a basic foundation of our country, the rule of law, for rules at the discretion of the Secretary of the Department of Health and Human Services. Unable to comply with the new law for the group insurance provided to their hourly and part-time employees, McDonalds, Jack in the Box and twenty seven other companies have been granted one year waivers. What will they get next year?
 
Insurance is a risk management business. Without a sufficiently large base of insured individuals to calculate loss exposure, affordable premiums cannot exist. Companies, such as The Principal, withdraw from the business reducing competition and individual choice.
 
Government health care coverage does not begin until 2014. Next year, Secretary of DHHS, Kathleen Sibelius, does not have to grant the waivers. Waivers are at the Secretary’s discretion. This is an open door for political extortion. If donations are “sufficient” to the appropriate political party, it might be easier to get your waiver, otherwise comply with non-economic mandates or quit providing health care benefits to employees. Now we know how we get to keep our current policies.
 
Real Estate:
 
Foreclosures have been a full employment business for attorneys. A web search for home foreclosures on Bing gave me 19,500,000 web sites. However, with Bank of America, Chase and others suspending foreclosures in 23 states, many attorneys may have to recreate their business model. On Saturday’s radio show, Ken Gronbach pointed out that the suspension radically reduces inventory available for sale or auction. (Listen to Ken’s comments on our podcast).
 
The fact that major banks cannot prove they have the right to foreclose on borrowers will grant de facto relief to people still in possession even if delinquent or in default on their loans. (Not all states, including Washington, require a judge to examine the original documents). The moratoria on foreclosures will not help resolve banking system stability. Unwinding this mess will take another four to five years and possible reactivation of the Resolution Trust Corp. that Congress created in the 80s to deal with commercial real estate defaults.
 
The Y-Gen looking for starter homes may create sufficient demand in some markets to kick-start home construction. Real estate, like the stock market, is a supply-demand market. Diminished supply could provide some relief to sellers as prices stabilize and to Y-Gen buyers finding much more affordable housing.
 
Stock Market:
 
Equities had another positive week in spite of continuation of declining employment. Official unemployment remained at 9.6% though Gallup’s more recent data showed an increase to 10.1%. Government non-census jobs were lost at both state and federal levels. The numbers were insufficient to indicate austerity is being embraced as fiscal policy. However, it does indicate some levels of government are confronting their reality of declining tax revenues.
 
Without stronger signs of economic recovery, investors assume the Fed will continue supporting the markets with another round of quantitative easing. This adds a new dimension to investing that is not addressed by Modern Portfolio Theory. Internally, the Fed members are still debating the wisdom of repeating what has not worked. We will only know the outcome when the facts change. What is, is.
 
The once popular Random Walk Theory, still clung to by many investors, has been discarded by more recent academics. If the theory was correct, then outperformance could not persist as shown by Dr. Ken French of Dartmouth. (See our home page for charts).
 
Waiting for history to return to average outcomes is wandering into the future with neither guide nor map. All future is uncertain. Price is what it is. Relative strength is simple. It requires price and a measurement of performance. It is not a guess about future events but adapts to changing trends.
 
Our primary asset allocation model favors domestic and international equities. Commodities, while not close to replacing either of the former, have been improving and have surpassed fixed income, currencies and cash for alternative asset exposure.
 
"When the facts change, I change my mind. What do you do, sir?” - John Maynard Keynes
 
Our plan is “the plan will change.” What is your plan?
 
If you would like a free relative strength analysis of your portfolio’s sectors and positions, call us at 800-317-9119 begin_of_the_skype_highlighting 800-317-9119 end_of_the_skype_highlighting.