Kevin Kroskey's Market Commentary

October 4, 2010 Weekly Market Commentary

The Markets

STOCK MARKET RISES SHARPLY

Thanks to a super strong September (the best in 71 years, according to CNBC), stocks rallied sharply for the quarter. It didn’t start off that well as Fed Chairman Ben Bernanke described the economic outlook as “unusually uncertain” in July. The stock market basically treaded water in July and August as it digested the second quarter’s big drop and the uncertain economic environment. By the time September rolled around, investors decided that the weak economy might actually be good news for the stock market. How? In the (il)logical way that the market sometimes works, investors began to believe that the economy was weak enough that the Fed would step in at some point with another round of quantitative easing. If that happened, interest rates might drop, the economy might get a lift, and stock prices might follow. That’s the theory, anyway, and investors followed it by bidding up stock prices.

ECONOMY STILL STUCK IN LOW GEAR

Normally, deep recessions are followed by strong growth. But, not this time. More than a year after the recession officially ended, we’re still stuck with a 9.6% unemployment rate and an economy that grew at a 1.7% annualized rate in the second quarter, down from 3.7% in the first quarter, according to The Wall Street Journal and Bloomberg.

On September 24, a concerned Ben Bernanke said, “A concerted policy effort has so far not produced an economic recovery of sufficient vigor to significantly reduce the high level of unemployment.” That was followed on September 30 by comments from New York Fed president William Dudley who said, “Further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long.” Together, these comments suggest to some market participants that the Fed is gearing up to dole out more goodies to reignite growth.

INTEREST RATES KEEP DROPPING

Investors still have a large appetite for bonds and the government and corporations stepped in to supply it “as new-debt issuance broke records and interest rates fell toward generational lows” in the third quarter, according to The Wall Street Journal. Like a coin, there are two sides to low interest rates.

On the plus side, low rates are a boon to corporations and banks as it lowers their borrowing costs and encourages them to reinvest in their businesses. It also helps the government because it lowers their borrowing costs.

On the negative side, savers get pinched. According to Dan Dekta, chief investment officer at Smith Breeden Associates, “The Fed has effectively been taxing money-market funds [by cutting short-term interest rates] to recapitalize the financial system and to make things easier on borrowers.” So, if you’re a saver, you get near zip on your savings while borrowers reap the savings.

THE DOLLAR DILEMMA

“The dollar seems to be the ugliest girl at the dance,” according to Lane Newman, director of foreign exchange at ING Groep NV in New York as quoted in Bloomberg. With the U.S. economy still relatively weak, investors are losing enthusiasm for the dollar because they fear the Fed will drive down interest rates even further. Low interest rates make the dollar less attractive relative to other countries that may offer higher rates. This concern helped drive the dollar to a third quarter loss that was its worst quarterly loss in eight years, according to MarketWatch.

A weak dollar does benefit U.S. exporters because it makes our products less expensive to foreign consumers. A strong export economy could help lower our unemployment rate and that’s one reason why our government is not too concerned about a weak dollar. Here’s the catch, though. Other countries may want a cheap currency, too, so they can revive their own exports. Since the value of a currency is only measured in relation to another currency (or a precious metal like gold), if too many countries try to devalue their currency, then it becomes a “race to the bottom.” In that scenario, it’s likely nobody will win.

And, speaking of gold, it hit record highs in the third quarter. John Roque of WJB Capital was quoted in Barron’s as saying, “all the price of gold tells you is what paper money isn't worth.” And, as gold keeps going higher, that suggests people are getting less and less comfortable with the value of paper money.

SUMMARY

The big rally in the third quarter was preceded by a big drop in the second quarter. Net, net, after nine months, the S&P 500 index is up 2.3% for the year. Despite a lot of huffing and puffing, we’re still just about where we started the year.

Weekly Focus – Think About It

“Live as if you were to die tomorrow. Learn as if you were to live forever.” --Mahatma Gandhi

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.

September 27, 2010 Weekly Market Commentary

The Markets

Is inflation good or bad for our economy? After last week, we now know the Federal Reserve’s answer to that question, and it may have a major effect on the financial markets going forward.

While the recession officially ended in June 2009, sluggish growth since then has concerned the Federal Reserve and that helped prod them to make their inflation intentions known in a statement released last week.

In the statement, the Fed said three times that current inflation trends are too low and that it is “prepared to provide additional accommodation if needed to…return inflation, over time, to levels consistent with its mandate.” According to Bloomberg, the Fed statement opened the door to more quantitative easing, which would pump more dollars into the economy and possibly lead to more inflation down the road.

By the end of the week, the financial markets were essentially saying, “bring it on.”

Prominent hedge fund manager David Tepper went on CNBC last Friday morning and commenting on the Fed news said, “Government intervention in the financial markets virtually guarantees that most investment choices will go up.”

Of course, nobody can guarantee anything in the financial markets, but putting Tepper’s hyperbole aside, the Fed’s statement is noteworthy. Like Alice going down the rabbit hole in the beloved children’s story, the effect of more Fed action could take us on an adventure into the economic and political unknown.

(Click on the picture below to enlarge the table in a new window.)

MAU PIAILUG, MASTER NAVIGATOR, DIED ON JULY 12, but his skill as a navigator can teach us a few lessons about what’s possible in business and life.

In 1976, Mau sailed a double-hulled canoe 2,500 miles from Hawaii to Tahiti without a compass, sextant, or charts. His objective was to see if ancient seafarers could have traveled this way from the south and west to populate Hawaii. In a moving tribute, The Economist said, “At that time, Mau was the only man who knew the ancient Polynesian art of sailing by the stars, the feel of the wind, and the look of the sea.”

The Economist further wrote:

By day he was guided by the rising and setting sun, but also by the ocean herself, the mother of life. He could read how far he was from shore, and its direction by the feel of the swell against the hull. He could detect shallower water by color, and see the light of invisible lagoons reflected in the undersides of clouds. Sweeter-tasting fish meant rivers in the offing; groups of birds, homing in the evening, showed him where land lay.

Clearly, this was a man who understood his craft and the deep principles underlying it. While modern tools could be used to accomplish much of what Mau did by feel and perception, sometimes modern tools are no match for deep understanding.

Likewise, investors sometimes get caught up in thinking that complexity and sophistication are the ticket to stock market riches. But, as Leonardo da Vinci said, “Simplicity is the ultimate sophistication.” You can still be successful without a Bloomberg terminal, without a high-frequency algorithmic trading system, and without using esoteric derivative securities.

Mau passed down his knowledge to a small number of students so his art is not lost to the world. The art of investing is not lost to the world either, and that is an area where we strive to be a continuous learner.

Weekly Focus – Think About It

“If one does not know to which port one is sailing, no wind is favorable.” --Seneca

Best regards,

Kevin Kroskey

September 21, 2010 Weekly Market Commentary

The Markets

Individual investors are having a hard time deciding if they want to be bullish or bearish on the stock market.

The American Association of Individual Investors is a non-profit association of 150,000 investors. Each week, the association compiles a sentiment survey of its members which measures the percentage of individual investors who are bullish, bearish, or neutral on the stock market for the next six months. Lately, their sentiment numbers have been all over the place.

For the week ending September 15, 2010, the bullish sentiment increased to 50.9%, which was the second highest reading in two years, according to Bespoke Investment Group. That was also well above the long-term average bullish reading of 39.0%. However, just three weeks earlier, the bullish sentiment was only 20.7%, which was its second lowest reading in the past two years.

So, what changed in the past three weeks? The simple answer is a very nice stock market rally. Between August 26 and September 16 -- the three weeks between the two surveys -- the S&P 500 index rose 7.4%, according to data from Yahoo! That rally helped turn many of the bears in the survey to bulls.

While this weekly sentiment survey is widely reported in the media, it is basically of little value unless it is at an extreme level of bullishness or bearishness. According to MarketGauge.com, bullish readings above 70.0%, “have been timely predictors of corrections in an up trend,” while bullish readings below 30.0% in a weak market, “indicate a level of fear and capitulation by individual investors which is common at market lows.” Even this 'timely predictor' descriptor needs to often be taken with a grain of salt.

Extreme sentiment readings may actually be a contrarian indicator of where the market is heading. The takeaway is, when individual investors get extremely bullish or bearish, it may be best to do just the opposite!

SUCCESSFUL INVESTING IS NOT LIKE DRAWING A STRAIGHT LINE from point A to point B. Rather, it’s more like being able to connect the zig-zag dots along the way.

Steve Jobs, the co-founder of Apple Computer, spoke to the graduating students at Stanford University in 2005 and told a story about how on a whim, he dropped in on a calligraphy class while he was attending Reed College back in the early 1970s. At the time, he found the class utterly fascinating, but totally useless. It wasn’t until 10 years later, when he was designing the Macintosh computer, that he was able to connect the dots. He decided to take what he learned about calligraphy and incorporate it into the computer. The result was the Macintosh, which became the first computer with beautiful typography. It became a huge hit in the desktop publishing market and helped launch Apple into a multi-billion dollar company.

Like Jobs connecting calligraphy to the computer, there are many “dots” on the investment landscape that, when connected, help draw a picture of the health of the financial markets. Here are a few “dots” to keep an eye on:

• Gold setting a new all-time record high last week, according to Financial Times
• U.S. interest rates near historical lows, according to The Wall Street Journal
• Inflation nearly non-existent in the U.S., according to MarketWatch
• The U.S. dollar near a 15-year low against the Japanese Yen, according to Bloomberg
• Trillion-dollar U.S. budget deficits, according to Bloomberg
• The U.S. unemployment rate near a 27-year high, according to MarketWatch
• The rise of the Tea Party movement, according to Barron’s
• The Federal Reserve engaging in quantitative easing, according to CNBC

Weekly Focus – Think About It

“When nothing is sure, everything is possible.” --Margaret Drabble

Best regards,

Kevin Kroskey

September 14, 2010 Weekly Market Commentary

The Markets

If you had an extra $1,000, would you use it to reduce debt or would you spend it on something discretionary?

How Americans answer that question may significantly impact economic growth over the next few years, according to an August 20 report from Federated Investors. If Americans decide to focus on debt reduction that could keep a lid on economic growth in the near term, but would likely be good for the economy over the long term. Conversely, if Americans start spending freely, it may boost short-term growth, but it might delay our day of reckoning and make it worse down the road.

(Click on the picture below to enlarge the table in a new window.)

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.

“ANYBODY WHO THINKS MONEY WILL MAKE YOU HAPPY, HASN’T GOT MONEY,” according to billionaire David Geffen. Now we have a new scientific study that helps quantify the connection between money and happiness.

Researchers Daniel Kahneman and Angus Deaton of Princeton University analyzed data from the Gallup-Healthways Well-Being Index and tried to determine how income affects an individual’s emotional well-being and overall life satisfaction. They measured emotional well-being as an individual’s day-to-day level of happiness (e.g., how much enjoyment, laughter, smiling, anger, stress, or worry they experience each day,) while overall life satisfaction was measured as an individual’s satisfaction with their life in general.

Here’s what they found.

As a person’s annual income rises up to about $75,000, their emotional well-being, or day-to-day happiness, rises, too. But, beyond $75,000 in annual income, there was no additional boost to day-to-day happiness, according to the researchers’ article published in the Proceedings of the National Academy of Sciences and reported by Inc. magazine.

What’s the key to $75,000? According to LiveScience.com, “The researchers suggest that making anything more than $75,000 no longer improves a person’s ability to spend time with friends, avoid pain and disease, and enjoy leisure time--all factors involved in emotional well-being.”

Ah, but more money does increase overall life satisfaction. According to the Inc. article, “With every doubling of income, people tended to say they were more and more satisfied with their lives on a 10-point scale--a pattern that continued for household incomes well above $120,000.”

Do these findings match your life experience? Let us know what you think.

Weekly Focus – Think About It

“An object in possession seldom retains the same charm that it had in pursuit.”

--Pliny the Younger

Best regards,

Kevin Kroskey

September 7, 2010 Weekly Market Commentary

The Markets

Where does 2 + 2 = billions of dollars? In the stock market, of course!

Back in the “good ol’ days,” investment professionals would spend their waking hours poring over financial statements, developing financial models, and analyzing reports to try and find undervalued stocks. The thought was you could find stocks that were selling below their “intrinsic value,” and, if you held them long enough, you would likely earn a nice return. Warren Buffett exemplifies this style of investing.

Today, with an interconnected world filled with impatient “fast traders” and economic uncertainty, there seems to be a fixation on the latest data released by Washington or some other business group that has its pulse on a sector of the economy. Last week, we had two great examples of how the publication of certain data helped move the markets.

On Wednesday, the Institute for Supply Management said its closely watched index of factory activity rose to 56.3% in August from 55.5% in July, according to The Wall Street Journal. This number was better than expected and suggested the manufacturing sector of the economy was holding up well. A similar report on China’s manufacturing sector also showed an unexpected rise. Stocks reacted by jumping 2.5% that day as measured by the Dow Jones Industrial Average.

And on Friday, the government released the August nonfarm payroll report and it was better than expected, according to CNBC. Stocks jumped on the news and the Dow rose 1.2% as fears of continuing gloom in the job market eased a bit.

So, the release of two reports in two days, (the 2 + 2), helped the stock market as measured by the Dow soar 3.7% and add billions of dollars in market value, according to data from Wilshire Associates.

In this type of data-driven market, trigger-happy traders can help cause big swings -- both up and down -- that tempt some investors into thinking that either the end of the world is near or happy days are here again. Ultimately, two pieces of data in two days may help add (or subtract) billions in market value, but they are insufficient to discern a new trend. Intrinsic value still matters over time, and daily data, while helpful, is only part of the puzzle of investing.

HOW THE RICH SPEND THEIR MONEY may have a big impact on the pace of our economic recovery. Consider this, the top 5% of Americans by income account for 37% of all consumer outlays, according to an August 5 Wall Street Journal article that was based on data from Moody’s Analytics. At the other end of the spectrum, the bottom 80% by income account for 39.5% of all consumer outlays. So much for the 80/20 rule!

The share of spending by the top 5% has grown over the years, too. Back in the third quarter of 1990, the top 5% accounted for 25% of consumer outlays versus the 37% today, according to the Journal article.

In a 2005 research report, analysts at Citigroup coined the phrase “Plutonomy” to describe countries that exhibit significant income and wealth inequality. Plutonomies also are disproportionately dependent on the spending habits of the wealthy. According to that 2005 report, Citigroup classified the U.S., U.K., Canada, and Australia as Plutonomies.

So, if you want to know where the economy is heading—follow the money!

Weekly Focus – Think About It

“If you start small, dream big, plant a seed of intention, and care for it, it’s not unrealistic to expect something marvelous to come up.”
--Marc Ian Barasch

Best regards,

Kevin Kroskey

August 30,2010 Weekly Market Commentary

The Markets

Has corporate America lost its gumption?

Three of the things that have made the United States so great are the determination, fearlessness, and entrepreneurial spirit of our people. Unfortunately, that seems to be a bit lacking right now with the leaders of some of our country’s largest companies.

For more than two years now, corporate America has been on a belt-tightening, cost-cutting push that has helped contribute to our high unemployment rate. While that has been bad for employees, it has sparked a significant revival in corporate profits. For example, according to a New York Times article based on data from the Bureau of Economic Analysis, second quarter corporate profits were within 4% of their pre-recession peak. And, by another measure, Barron’s magazine pointed out that corporate profits as a percentage of gross domestic product are near 40-year highs.

So, if corporate America is doing so well, why aren’t they hiring and why is the stock market stuck in neutral?

In a word -- uncertainty.

Even top Federal Reserve officials are having a hard time agreeing on what to do next to help the economy. On August 10, 17 of them met and, according to an August 24 Wall Street Journal article, at least seven of them spoke against or expressed reservations about the ultimate decision Chairman Bernanke made to keep the Fed’s balance sheet from shrinking. Toss in government regulation, an upcoming mid-term election, tax policy uncertainty, a deflation/inflation debate, and stubbornly high unemployment, and there’s plenty to muddy up the waters.

Corporate America is reacting to this uncertainty by conserving cash and keeping a lid on hiring. However, this will eventually change, and, on a positive note, we may be starting to see that happen as corporate acquisitions are on the rise. The current bidding war between two blue-chip technology companies for an obscure data-storage company may be one example of gumption returning to the boardroom… and that’s good!

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.

WHO HAS A WORSE DEBT BURDEN, countries in developed markets or countries in emerging markets? Well, by at least one measure, developed countries are in worse shape.

According to the August 2010 newsletter from Research Affiliates, LLC, “Developed markets account for 62% of the world’s GDP and owe 90% of the world’s sovereign bond debt. The emerging markets collectively produce 38% of the world’s GDP and owe just 10% of world sovereign bond debt.” In other words, relative to the size of its economies, developed market countries (like the U.S.) have a much higher debt burden.

This debt level is problematic because it hampers a country’s ability to grow. On the flip side, emerging market countries that are not swimming in debt are some of the fastest growing in the world. China is a good example. Its breakneck growth has led to a 60-mile long traffic jam on a main highway leading into Beijing that is still unfolding, according to The New York Times. The culprit? A parade of coal trucks trying to supply the rapidly growing energy needs of Beijing.

Over time, as the developed world tries to pare its debt through austerity programs, sluggish growth may result. World leaders are banking on emerging countries like China to help pickup the economic slack. The extent to which these emerging countries can do that may have a big impact on how long the U.S. stays stuck in neutral.

Weekly Focus – Think About It

“Don't waste life in doubts and fears; spend yourself on the work before you, well assured that the right performance of this hour's duties will be the best preparation for the hours and ages that will follow it.”
--Ralph Waldo Emerson

Best regards,
Kevin Kroskey

August 24, 2010 Weekly Market Commentary

The Markets

“We don’t think the world has ended.”

With so much doom and gloom being published these days, it’s refreshing to hear a respected leader of a global, blue-chip company make a positive statement. Doug Oberhelman, the chief executive officer of Caterpillar, met with analysts last week and painted a rather bright picture of the world economy, including the quote above.

Oberhelman went on to say that Caterpillar does not expect a double-dip recession because the world’s central bankers are staying on top of the situation and the global economy is improving -- especially in the developing world. As the world’s largest maker of construction and mining equipment, Caterpillar is considered a good indicator of worldwide economic health, according to Associated Press.

One question that many analysts and economists are struggling with is, “Can the world recover without the United States?” As the world’s largest economy, there’s an old saying that when our economy sneezes, the world catches a cold. Well, we’ve certainly done more than sneeze in the past three years. Optimists say that yes, the U.S. is still important in the world economy, but other countries, most notably China, India, and Brazil, can still prosper even if the U.S. is down for a few counts. They call this “decoupling.”

Underscoring this idea of decoupling is the fact that China just passed Japan as the world’s second largest economy, according to The New York Times. Forecasters are predicting that China will surpass the U.S. as the largest economy by as early as 2030.

Caterpillar, for one, thinks the world will continue recovering even if the U.S. is a bit weak. And the stunning growth of China makes that idea plausible.

* The Standard and Poor 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.