The market has drawn a proverbial line in the sand, and it runs along the Greek border. Investors have decided that the future of the free world lives and dies with Greece. The thinking is that if Greece defaults, it will have a Lehman type domino effect and not only bring down other weak nations like Portugal, Italy and Spain (those are the PIIGS you’ve probably heard about, add in Ireland and you see the acronym), but strong banks too. There is certainly reason to worry. They are right. Just like when Lehman failed, forcing several money market funds to “break the buck”, a European contagion would have a similar affect, only worse. For this reason, I have been advising clients to use Government Money Market Funds exclusively. Yes, even money markets aren’t safe, as they too will eventually fail.
However, that is not going to happen today, as the Greek Parliament put off the inevitable. Everyone knows that there is no chance that Greece could ever repay the debt they’ve taken, but the western world takes a very Zen approach to a very non-Zen problem – why pay for something today if you can pay twice the price in blood and treasure tomorrow. It’s kicking the can down the road, so to speak.
The bigger issues facing not only our economy but most of the developed world are still with us. The country’s demographics, where we now have an aging population – (basically too many old people and old people just naturally spend less than people in their 30’s and 40’s), and an over-indebted population. The funny thing is that this still comes as a surprise to most investors. Even Ben Bernanke has expressed his surprise at how slow the recovery has been. What most fail to understand (or admit) is that these issues have been brewing for years and will be with us for some time, and are exactly what I discuss in my new book, Facing Goliath: How to Triumph in the Dangerous Market Ahead. This is a must read for every investor.
For the more immediate future now that the threat of a Greek default is behind us, (temporarily of course), investors’ attention will once again focus on earnings. In the big picture, it is earnings that move stocks, while the headlines move emotions. That’s welcome news because earnings should be very good this quarter. Yes, earnings can be good in a bad economy, for a little while at least. Just don’t be lulled into a false sense of security. U.S. corporations continue to have good sales growth, but they’re not giving it back in wages and labor. This keeps margins high and earnings growing, even though the unemployment rate stays grossly high. Currently, wages and salaries make up 48.9 percent of gross value- added for domestic businesses, according to Commerce Department data. That’s up slightly from 48.7 in December, the lowest since records began in 1929. Meanwhile, corporate profits continue to scream higher. Basically, this means that corporations are squeezing productivity from workers, which helps their bottom line, but not the economy.
However, this could very well be the peak in earnings for this cycle, as there is no doubt that the economy is slowing, largely from the issues I mention above. Without a QE3, the economy will likely continue to sink, so there is little doubt that the Fed will not maintain its accommodative stance. If we do not see a full blown QE3, we will most certainly have the continuation of QE Mini-Me. Clearly investors need to be properly prepared, investing “tactically” to get the very best returns with the least risk possible. Invest for need and not for greed!
… And that’s where we can help. If you would like a free second opinion on your portfolio, don’t wait until it’s too late. Give me a call today. Our active, hands-on tactical investment management style is tailor made for markets like this and can help you manage risk and deliver returns.
Regards – Keith