Kevin Kroskey's Market Commentary

May 3, 2010 Weekly Commentary

The Markets

Two tragedies, worlds apart, reached a boil last week and affected the financial markets in a not so pleasant way.

Greece, which is an ocean away and no stranger to tragedy, (think Aeschylus, Sophocles, and Euripides), nearly imploded last week on fears that its government was bankrupt. With huge budget deficits and no credible way to pay them, Greece saw its short-term government bond yields soar past 20%, according to Barron's. By contrast, the comparable bond in the U.S. yielded about 1% last week, according to the Treasury Department. As a euro country, Greece has limited tools to deal with the crisis on its own (e.g., it cannot devalue its currency or adjust its interest rates) so it has to rely on the kindness of neighbors to bail it out. This past weekend, the European Union and the International Monetary Fund announced that they will support Greece with a $146 billion multi-year aid package, according to Bloomberg. Now comes the hard part for Greece--implementing the austerity measures that accompany the bailout.

The concern that this debt problem could spread and undermine the euro countries helped undercut many world stock markets last week.

Closer to home, the uncapped oil leak in the Gulf of Mexico has states bordering the Gulf bracing for an environmental and economic disaster. The Gulf is a major oil-producing region and this spill could deter new drilling, a thought which helped send oil prices up more than 1% last week. Unfortunately, fishermen, the tourism industry, and the environment itself all stand to lose, too, as the spill worsens.

While the twin tragedies captured many of the headlines last week, much of the economic news was bullish. For example, first quarter gross domestic product grew at a respectable 3.2 percent annual rate, household spending increased at the fastest rate in three years, and The Institute for Supply Management-Chicago Inc. said its business barometer rose to 63.8 in April, the highest level in five years, according to Barron's. On top of that, The Economist magazine said, "global output is now back to where it was before the downturn…(and) there is growing optimism that the recovery is becoming self-sustaining."

Although the twin tragedies are still developing, recent solid economic news has helped limit their financial market impact.

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* This newsletter was prepared by PEAK.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Past performance does not guarantee future results.
* You cannot invest directly in an index.
* Consult your financial professional before making any investment decision.

April 26, 2010 Weekly Commentary

The Markets

A trillion here, a trillion there, pretty soon we're talking serious money.

Between the October 2007 all-time high and the February 2009 low, world stock market valuation declined from $63.0 trillion to $28.6 trillion, according to the World Federation of Exchanges. That's a drop of $34.4 trillion or 54.6% in just 16 months--serious money, indeed. Almost as remarkable, world stock markets started rebounding in March 2009 and by March 2010, they had climbed back to $49.1 trillion in valuation, which represents a 71.7% increase from the low. That's a rise of $20.5 trillion in 13 months and leaves us "just" $13.9 trillion short of the October 2007 all-time high.

Many pundits in print, TV, and online have wondered how the economy is showing surprising strength in the face of near double-digit unemployment. One simple answer is that our world still has tremendous wealth in the form of equity investments. As described above, world stock market valuation has risen $20.5 trillion since the low and this has helped investors/consumers feel wealthier. And, in a little known fact, world stock market valuation at the end of last month was $12.7 trillion higher than it was five years ago. According to a concept called the "wealth effect," as investment wealth increases, consumers feel more secure and they start spending more.

So, even though the U.S. unemployment rate is high, overall world wealth in the form of equity investments is in decent shape and the trend over the past year has been up. This "equity wealth" is helping support worldwide economic activity.

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable or not available.

ONE THING THAT SPORTS AND THE STOCK MARKET HAVE IN COMMON is that momentum frequently determines who wins or loses. Athletic teams that get on a roll often end up winning because "momentum" is on their side. Likewise, similar to Newton's first law of motion, the stock market can stay in a trend for a long time until something substantial comes along to knock it off course.

Recent upward momentum in the stock market has been very strong. In fact, the 14-day relative strength index (RSI) on the S&P 500 closed above 65 for 29 consecutive days ending April 15--its longest such streak above 65 in 24 years, according to Bloomberg. The RSI is a technical indicator that measures the speed and change of price movements (i.e., momentum) and it fluctuates between 0 and 100, according to StockCharts.com. Readings in the 65 area indicate solid upward price momentum.

Why should you care about this idea of momentum?

It's important because momentum can help determine the underlying strength of the market. When the market is showing broad-based momentum, it often takes something significant to change its course.

This does not mean the market will go up in a straight line during periods of strong momentum. For example, the S&P 500 dropped 1.6% on April 16 when the government announced it was charging Goldman Sachs with fraud. But, it turns out that there was enough underlying strength in the market that it only took five trading days for the S&P 500 to recoup all of its Goldman-led losses, according to data from Yahoo! Finance.

Technical indicators like the RSI are certainly not foolproof. However, they may be helpful in assessing the near-term strength of the market and its susceptibility to corrections.

Weekly Focus – Think About It
"I never predict. I just look out the window and see what is visible--but not yet seen."
-- Peter Drucker

Best regards,

Kevin Kroskey

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Past performance does not guarantee future results.
* This newsletter was prepared by PEAK.
* You cannot invest directly in an index.

April 19, 2010 Weekly Commentary

The Markets

Lloyd Blankfein, the chief executive of Goldman Sachs, described himself as "doing God's work," in a profile last year in London's Sunday Times. Last Friday, the SEC charged Blankfein's firm with defrauding investors in connection with securities linked to subprime mortgages. Investor reaction was swift as Goldman's stock dropped more than 12% on the day and the Dow Jones Industrial Average lost 125 points, according to Associated Press.

A volcano in southern Iceland erupted last week and sent a massive ash plume across Europe, which caused the cancellation of tens of thousands of flights over a several day period and created unexpected hardship for millions of travelers, according to CNN. This floating ash plume is costing the airline industry at least $200 million a day, according to the International Air Transport Association.

So, what's the connection between the Goldman Sachs fraud case and the Icelandic ash plume? Nothing! Yet, in the world of investing, seemingly random and unpredictable events like these can materially affect financial markets and specific stocks.

The fact that random and unpredictable events can trigger financial disturbances is one reason why it is important to keep an eye on capital preservation and not just focus on capital appreciation.

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable or not available.

WHICH IS MORE IMPORTANT--making sure you participate in the market's 10-best performing days or avoiding the market's 10-worst performing days over any given period? Based on the 81 years between January 3, 1928 and March 31, 2009, here are some numbers to help us answer this question, according to data from Invesco Aim:

 The 10-best performing days in the S&P 500 index yielded a daily average return of 11.7%. The 10-worst performing days yielded a daily average return of -10.8%.
 If you missed the 10-best performing days, $1 would have grown to just $14.99.
 If you missed the 10-worst performing days, $1 would have multiplied to $143.47.
 If you missed the 10-best and the 10-worst days, $1 would have grown to $47.59.
 On a buy and hold basis, one dollar invested at the beginning of this 81-year period would have grown to $45.18 by March 31, 2009.
 All 10 of the worst performing days occurred during bear markets as did seven of the 10 best-performing days.

Here are a few thoughts on interpreting this data:

 First, missing the 10-best performing days reduced your growth over the entire 81-year period by about two-thirds compared to staying fully invested during that period. This makes a case for staying fully invested so you don't miss these big up days.

 Second, missing the 10-worst performing days more than tripled your results compared to staying fully invested. This suggests that historically, if you had magical powers to foresee the future and were out of the market on the 10-worst performing days, your return would have more than tripled the return of the fully invested buy-and-hold strategy. This makes a case for market timing.

 Third, missing both the 10-best and 10-worst days in the market had very little impact on your results compared to just staying fully invested during the entire period. Score another one for buy-and-hold.

But, let's be realistic. The above numbers are based on historical data, you cannot invest directly in an index, and few people have an 81-year investment horizon. And, by the way, nobody we know has the ability to perfectly time the market and pinpoint the 10-best and 10-worst performing days before they happen.

This data helps support two of my beliefs. First, the historical data shows the importance of risk management relative to return maximization. Second, your investment plan must be designed to meet your financial goals, not simply to capture or avoid the best and worst days in the market. Ultimately, it's your number that we are trying to achieve.

Weekly Focus – Think About It
"You only have to do a very few things right in your life so long as you don’t do too many things wrong." --Warren Buffett

Best regards,

Kevin Kroskey

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Past performance does not guarantee future results.
* You cannot invest directly in an index.
* This newsletter was prepared by PEAK.* Consult your financial professional before making any investment decision.

April 12, 2010 Weekly Commentary

The Markets
The U.S. stock market continued grinding its way higher last week as the Dow Jones Industrial Average briefly pierced the 11,000 level for the first time since September 2008, according to The Wall Street Journal. Back then, the Dow was piercing 11,000 on its way down to below 7,000 in March 2009. This time, it's on its way up from the March 2009 low. Same number, but clearly a much different feel.

The main difference between then and now is the economy--it was bad then and getting worse, now, it is still weak but clearly improving.

On the improvement side, Thomson Reuters says analysts are looking for a 37% rise in first-quarter 2010 corporate earnings. Retailers reported a whopping 9.1% jump in March same-store sales, according to Barron's. On top of that, "The service sector is growing at the fastest pace since May 2006, and manufacturing the most since 2004. Employers are hiring again, and sales of existing homes rose 8.2% in February," according to Barron's. Stats like that are keeping investors interested in owning stocks even at ever-increasing prices.

Of course, the problems of the Great Recession are still here such as high unemployment, unsustainable budget deficits, tight credit, and weak housing. However, there is a potential solution to working our way out of this hole. The Economist magazine calls it a "re-balancing" of the world economy. Put succinctly, the magazine said, "If Americans save more and spend less while other big countries do the opposite, the world economy will prosper." In effect, the U.S. will need to export more to other countries who gobble up our goods and services. A weaker dollar could speed up this re-balancing; and, word that China might let its currency appreciate against the dollar in the near future supports this re-balancing theory, according to MarketWatch.

Notes: S&;P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable or not available.

U.S. COMPANIES ARE SITTING ON A RECORD PILE OF CASH and that could buy stock prices as companies use their cash to repurchase stock, according to Bloomberg. At the end of 2009, S&P 500 companies were sitting on a record $831 billion in cash, according to Standard and Poor’s. This cash hoard grew as companies spent only 28% of their operating profits on stock buybacks in 2009, according to Standard and Poor’s as reported by Bloomberg. Further, Bloomberg said, "The last time the ratio dropped to that level, the S&P500 subsequently climbed for four years."

Prominent money manager and Forbes columnist Ken Fisher said in a Bloomberg television interview in early April, “There’s cash sitting there, waiting to come in later, which will then later help buoy both businesses and stocks. This bull market will carry on for several years.” Yes, it is getting easier to find reasons for the stock market's year-long rise. But, just like in the late 1990s, a good fundamental story can get taken to an extreme and end in major disappointment.

One of the hallmarks of great investors is their ability to manage their enthusiasm. Rather than succumbing to euphoria, they try to maintain perspective. They aim to balance the positive with the potential negatives and not get carried away with an untamed crowd.

With the S&P 500 still down more than 20% from its all-time high and trading volume relatively low, we are likely not in danger (yet) of a new wave of market hysteria. However, we are always mindful of what could go wrong and, if this market keeps rising, so will our concern about the danger of getting caught in an "untamed crowd."

Weekly Focus – Think About It
"Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected." -- George Soros

Best regards,

Kevin Kroskey

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Past performance does not guarantee future results.
* You cannot invest directly in an index.
* Consult your financial professional before making any investment decision.
* This newsletter was prepared by PEAK.

April 5, 2010 Weekly Commentary

THE FIRST QUARTER IN REVIEW

STOCK MARKET RALLY CONTINUED

The stock market followed 2009's powerful rally with a strong performance in the first quarter. The S&P 500 rose 4.9%, excluding dividends, which was its best first-quarter percentage gain since the heady days of 1998, according to MarketWatch. Strong corporate earnings, solid corporate balance sheets, and upbeat manufacturing data helped support the stock market's bullish results, according to The Wall Street Journal.

It wasn't a straight line up, though. Between late January and early February, the Dow Jones Industrial Average dropped more than 7% as news of credit tightening in China, sovereign debt woes in Greece, and debates in Washington on healthcare and bank reform helped scare investors, according to The Wall Street Journal. The scare was brief as investors quickly "bought the dip" and sent the averages higher by the end of the quarter.

INTEREST RATES WERE STABLE

The yield on the 10-year Treasury was essentially unchanged during the quarter as investors continued to snap up all the debt the government offered, according to The Wall Street Journal. Demand for corporate and high-yield bonds was robust which helped keep those rates at relatively low levels.

Some investors are concerned that our large budget deficits may result in a glut of bonds, which could cause interest rates to rise substantially. That could put the brakes on an economic recovery, but this worry has not come to fruition--yet.

THE DOLLAR ROSE AGAINST THE EURO

The big story in foreign currencies during the first quarter was the strength of the dollar against the euro. According to The Wall Street Journal, the dollar rose 6% against the euro as debt concerns in Greece, Portugal, and Spain weighed on the common currency. Investors are also evaluating the relative strength of the U.S. economy versus the euro countries and it appears that a consensus is building that our country may grow faster. If that occurs, it may mean interest rates could rise sooner in the U.S., which would also help support a strengthening dollar.

DOUBLE DIP RECESSION LOOKING LESS LIKELY

Recent economic indicators suggest the economy is healing from the severe recession of 2008-2009. For example, the Commerce Department said consumer spending rose in February for the fifth consecutive month. Consumer spending makes up about 70% of gross domestic product, according to Morningstar, so a rise in this number bodes well for the economy. The manufacturing sector is looking robust, too, as the ISM manufacturing diffusion index rose to 59.6% in March, which was its highest level since July 2004, according to MarketWatch. Readings over 50% indicate that more firms said business was improving than said it was worsening. It was also the eighth straight monthly increase.

Just after the quarter ended, the Labor Department released the March payroll report and it showed a gain of 162,000 payroll jobs. It was the third gain in the past five months and the largest increase since March 2007. This report, coupled with other economic data, prompted Robert Hall, the head of the National Bureau of Economic Research’s Business Cycle Dating Committee, to say that it is "pretty clear" that the deepest recession since the 1930s is over, according to a Bloomberg report. Hall's organization is the "official" source on declaring the beginning and ending of recessions. Jeffrey Frankel, another member of the business cycle dating committee, said, "The most likely date for the recession’s end would be midyear of 2009," according to the same Bloomberg report.

This mid-2009 date would seem to confirm the validity of the stock market rally that we've experienced over the past year. The market started rising in March 2009--not too far ahead of the time that Frankel suggested the recession ended.

SUMMARY

The stock market performed well in the first quarter as earnings growth continued to shine and the economy continued to mend. Longer-term issues such as large government deficits, housing weakness, and the withdrawal of stimulus money hang over the markets like a black cloud, but so far, these concerns have not deterred investors.

Weekly Focus – Think About It
"Economic progress, in capitalist society, means turmoil."
-- Joseph A. Schumpeter

Best regards,

Kevin Kroskey

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. * The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. * The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market. * Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association. * The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998. * The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones. * Yahoo! Finance is the source for any reference to the performance of an index between two specific periods. * Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. * Past performance does not guarantee future results. * You cannot invest directly in an index. * This newsletter was prepared by PEAK.

March 29, 2010 Weekly Commentary

The Markets

The stock market seems to be climbing the proverbial "wall of worry."

Despite potential road hazards such as sovereign debt issues, rising interest rates, a weak job market, and a stalled housing recovery, investors bid up stock prices last week to an 18-month high, according to MarketWatch. Of course, these things could eventually affect stock prices, but, for now, stocks are riding the momentum of improving earnings and some underlying stability in the economy.

Lack of job growth has been a major problem for our economy the past couple years, but that could change this week. On April 2, the government will release the March employment report and, according to CNBC, economists expect it to show a rise of about 200,000 non-farm jobs. That would be a small down payment on the 8.4 million jobs lost since December 2007, according to Bloomberg. The fact that the S&P 500 has risen for four consecutive weeks may suggest that the market has been anticipating a good report. Ironically, on the day the employment report is released, the U.S. stock market will be closed for the Good Friday holiday, so we won't know the market's reaction until the following Monday.

Fear of a double-dip recession seems to be fading, too. In its final revision, the Commerce Department said fourth quarter 2009 GDP increased at a 5.6% annualized rate, which is the fastest rate in six years. For 2010, economists surveyed by MarketWatch expect GDP to expand at a non-recessionary 3% rate. On a regional note, the Great Lakes commercial shipping season has started early partly due to increased demand for iron ore and coal. "Things are moving quicker, sooner than a year ago. And it seems like more ships are involved," said Eric Reinelt, Port of Milwaukee executive director as quoted in the March 28 edition of the Milwaukee Journal Sentinel.

So, despite the worries, there is some good economic news supporting stock prices.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable or not available.

THE DAY OF RECKONING due to our country's ballooning deficits may be getting closer. Back in 2008, the Congressional Budget Office (CBO), projected the U.S. would run a budget surplus of $247 billion for the years 2009 through 2018. Now, just two years later, CNBC and the CBO have crunched the numbers again and project that we will incur a $7.4 trillion deficit during that 10-year period, according to a March 26 CNBC article.

How could the situation deteriorate so much in just two years?

The CBO said 57% of the projected deficit increase was due to lower government revenues--much of which is due to the decline in our economy and projected sluggish economic growth. The other 43% included expenses such as, "the stimulus bill, a change in accounting for the war, extended unemployment benefits, and additional interest on debt."

At the end of 2009, the U.S. national debt stood at $12.3 trillion, according to the Treasury Department. Tack on the projected deficit over the next 10 years and we could be close to $20 trillion in the hole 10 years hence.

Like chocolate chip cookie dough, a spoonful of annual deficit and national debt is fine, but gorging our country on borrowed money may eventually cause significant problems. Too much government debt could lead to rising interest rates and slower economic growth, according to Fortune Magazine. In a worst-case scenario, it could lead to economic collapse.

We have several options to solve the budding debt problem before it gets completely out of hand. First, we could grow our way out of it. This is the preferred method and the least painful. Second, we could raise taxes. Third, we could cut government spending. Most likely, we'll see a combination of the three.

Given the magnitude of our swelling deficits, we will likely have pain in our future. Whether that pain happens in our generation, our children's, or our grandchildren's, remains to be seen.

Weekly Focus – Think About It

"The way to wealth depends on just two words, industry and frugality."
--Benjamin Franklin

Best regards,

Kevin Kroskey

P.S. Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.

* This newsletter was prepared by PEAK.
* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Past performance does not guarantee future results.
* You cannot invest directly in an index.
* Consult your financial professional before making any investment decision.

March 22, 2010 Weekly Commentary

Earnings drive stock prices, right?

It's easy to say that the stock market is nothing more than a "casino" that is driven by "speculators," but over the long term, earnings do drive stock prices. So, how do corporate earnings look these days? Actually, pretty good.

We've just wrapped up the fourth quarter 2009 earnings reporting period and 72% of the companies in the S&P 500 beat earnings estimates, according to Thomson Reuters, as reported by The Wall Street Journal. For all of 2009, S&P 500 earnings came in at about $57, up from $49.51 in 2008, but below the peak of $87.72 in 2006, according to Standard & Poor's.

For 2010, Wall Street strategists expect S&P 500 profits of about $75, according to Barron's. With the S&P 500 closing last week at 1160, this means the index is selling at a price-to-earnings ratio (P/E) of 15.5 based on expected 2010 profits. Historically, based on the trailing 12-months earnings, the long-term average P/E ratio of the S&P 500 was 18.3, according to data from Barclays Capital, as reported by The Wall Street Journal. Therefore, if 2010 profits do arrive as projected, then the current market may be undervalued based on the historical P/E ratio.

But, here's where it gets interesting.

In 1998, S&P 500 earnings were $44.27 while the index closed that year at 1229, according to Standard and Poor's and data from Yahoo! Finance. Yet, last week, the S&P 500 closed at 1160--about 6% below the level of year-end 1998--despite the fact that S&P 500 earnings in 2009 came in at about $57--more than 28% above the level in 1998, according to Standard and Poor's. Even more remarkable, S&P earnings in 1999 were $51.68 (still below 2009's earnings) and the S&P 500 closed that year at 1469, which leaves our current market 21% below 1999 even though last year's earnings were about 10% higher than 1999's.

Are you dizzy, yet?

In short, earnings are significantly higher today than they were in 1998 and 1999, yet stock prices are still lower. This seeming paradox occurred because investors are placing a lower P/E multiple on today's earnings than they did on 1998's or 1999's earnings. That's the good news.

The bad news is an alternative measure of the P/E ratio, which uses 10-year average corporate earnings instead of just the past year, shows the S&P 500 at a P/E ratio of 20.6. Yale economist Robert J. Shiller popularized this measure and the P/E of 20.6 is currently higher than the historical average of 16 using this methodology, according to The New York Times. So, by this calculation, the current market may be overvalued.

So which is it? Whether undervalued, overvalued, or just right, you can find data to support any opinion. A goal-based portfolio should be designed to weather all storms.
Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable or not available.

THE YEAR 2012 has significance for some people as a year of either cataclysmic devastation or spiritual transformation. For the people on Wall Street, it means something entirely different--big bills are coming due.

During the heady days of the pre-2008 credit crisis, private equity firms and other companies racked up more than $700 billion of risky, high-yield corporate debt to finance buyouts and other transactions. Those loans start coming due beginning in 2012 and there is some concern about the debt market's ability to absorb them, according to a New York Times article.

On top of the corporate debt, the U.S. government is projected to borrow about $2 trillion in 2012 to fund its deficit. When you combine the financing needs of the private sector with the government's needs, 2012 may turn out to be a pivotal year. If the debt markets have trouble handling all this debt, one outcome might be a rise in interest rates. If interest rates were to rise precipitously, that could hurt corporate earnings, and, ultimately, stock prices. This debt overhang will likely need to be resolved before the stock market can reach a new all-time high.

Weekly Focus – Think About It

"Valuation matters. Over periods of decades, the average rarely happens; above-average returns occur when P/E ratios start low and rise; below-average returns occur when P/E ratios start high and decline."

--Ed Easterling, author of Unexpected Returns: Understanding Secular Stock Market Cycles

Best regards,

Kevin Kroskey, CFP, MBA

* This newsletter was prepared by PEAK.
* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Past performance does not guarantee future results.
* You cannot invest directly in an index.