It’s hard to believe that the 2nd half of 2011 is here already, and where does the time go? Josh will be 17 this month. It feels like just yesterday, I was announcing his birth in one of these newsletters. Times have changed for the better as I had a mustache then (Why didn’t somebody stop me?). Although, from an investor standpoint, it’s not so good as the market was at about the same level as it is today.
The worsening employment situation, as evidenced by this morning’s jobs report clearly shows that we’ll be slogging through the mud for a long time to come. However, lucky for us a new quarter is upon us and with it a new earnings season. At last something for the market to focus on other than Europe and the US economy. After all, it is earnings that really drive stocks. Sure, the worsening economy will have a negative effect on earnings, but it shouldn’t show up this quarter.
Pimco’s Bill Gross said it best:
“Corporations are in the catbird seat. They’ve got cheap financing, cheap leverage. They’ve got cheap labor and the ability to move from one country to another at their will. And so corporations basically have done very well.”
What Bill is essentially saying is that with all the excess liquidity sloshing around the economy from the quantitative easing programs and the continuation of QE Mini-me, corporations couldn’t help but prosper. This has translated into stellar earnings which will be reflected in this quarter’s as well, which I expect to push stocks to new highs. Although, if earnings disappoint, the recovery rally is over.
However, these advantages are quickly dissipating as corporations are running out of magic powder to increase productivity from workers. The continued high unemployment, over- leveraged consumer and our aging population will continue to hinder new large scale consumption until the next generation, the “Echo Boomers,” begin entry into their peak spending period, which is not for several more years.
Even though the economy has strengthened, much if not all of it has directly increased the deficit. On the surface, the massive borrowing needed to fund the stimulus programs, appears to be a good move, as it gives an instant and immediate boost to the GDP. This makes it like prosperity and good government policy. Unfortunately, it cannot substitute for private sector investments which are necessary to drive our nation’s long-term growth. More debt means higher future tax burdens, draining future private sector investments, and decreasing returns on investments. This reduces current and future private sector investments, which directly impacts future growth. This is discussed in great detail in Facing Goliath – How to Triumph in the Dangerous Market Ahead, a must read for every investor.
Therefore, barring another full scale QE3, this could very well be the peak in this cycle’s earnings phase, and investors have to prepare accordingly. Once this crippled economy starts to affect stocks, growth is going to be hard to find. Thus, we will continue to concentrate on our Tactical investment approach and focus on good quality tax-free bonds, high yielding stocks and corporate bonds, where we are still finding yields of over 8-10%. Investing should not be an all or none game, so why take all the risk of the stock market if you don’t need to? Invest for need, 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.
A word on gold:
I gave an interview to Myra Saefong at MarketWatch this morning on gold and here’s a brief synopsis of what I said:
“Investors know governments will now need to continue the stimulus programs and keep printing money,” said Keith Springer, president of Springer Financial Advisors in Sacramento, Calif. “They know they can’t and won’t throw in the towel yet and let the economy sink back into recession. Some investors are also buying gold as a hedge against Armageddon.”
Read the full article
Regards – Keith Springer