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Critcial Economic and Market update April 14, 2010

Posted At : April 14, 2010 12:59 PM

Invest with Your Head, Not with Your Heart

Economic Update

As we emerge from the depths of the Great Recession, the battle rages over what kind of recovery this is. Many suggest that we will see a typical recovery, like we have seen with every recession since World War II. These are generally professionals and institutional investors. The individual investor is a markedly different story and is practically the polar opposite.

As I have discussed in previous commentaries and interviews, successful investing requires the correct interpretation of the data at hand, a strong heart and most importantly, the suppression of emotion. Thus, invest with your head, not your heart. Easier said than done though, right? That’s why it’s so hard to manage your own money.

The fact of the matter is that investors who can follow this rule always make out better. Unfortunately for most, these are almost always institutional investors, not individual investors, and this time around is no different. The economic recovery is happening, folks, whether we like it or not, and professional investors have been all over it. They got bullish months ago and the economic data has supported their confidence in a recovery.

What is different this time around, however, is that it is being led by the manufacturing sector, not the consumer. Capital spending is strong. A case in point is AT&T’s recent announcement that it is spending over $1 billion to expand its network. That’s Defense Department-type spending! Although the consumer is trying, the savings rate has plummeted once again down to the 3% level. (Will we ever learn?) However, unemployment has bottomed and is improving, albeit slowly.

Even in the face of strong economic numbers, the individual remains a non-believer. After two bear market demolition derbies in one decade, who could blame them? “Surely the enormous deficit will limit growth,” they say. “The printing of money just has to lead to runaway inflation.” “I’m tired of all those fat-cat bankers robbing us blind. Stocks just have to go down.” It all makes sense…emotionally.

I agree in many respects. I hate the government bailouts, too. After all, capitalism without bankruptcy is like Christianity without hell. Above that, we have had a massive deleveraging recession and we are still deleveraging, which will take years to conclude.

However, even though the issues above are serious, they are not immediate concerns for the market.

The market looks out about 6-18 months. What it sees
are companies that downsized quickly, reduced costs and adapted to the marketplace. As a result, corporate earnings are rebounding strongly. Sure, the deficit is startling, but (as much as I hate to admit) it is not an immediate danger. The printing of money, too, is not an immediate threat, but keep in mind that deleveraging destroys money, and it is destroying money faster than the government can inflate. In fact, the government would love to generate inflation and is trying its hardest to do so, but it cannot. Again, this will be a problem for the future, but not today.

So what kind of economic period can we expect? One I have coined a “slog through the mud.” We may be at the bottom of the hill, but it’s a long, slow, grueling climb back to the top.

Regards – Keith Springer, President of Springer Financial Advisors

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