Critical Economic and Market Commentary:
It's all Greek to Me!
What a Difference an Ocean Makes! On our side of
the sea, we've had a wave of improving economic data.
been just stellar - 77% of companies have beat estimated profits
for the quarter and are on track to grow 56% compared to the
same period in 2009.
nil - the Fed can and will keep rates low.
there is tons of money on the sidelines in cash and money
markets, as well as in bond funds, waiting to come back to bonds
when it's safe.
investors remain skeptical - sentiment remains strongly negative
(which is a positive for stocks).
Two critical issues must be resolved to turn the
current rally into a new multi-year bull market.
1. Unemployment must decline; and
2. Consumer spending must come back strong.
Last week's better-than-expected unemployment
data was a breath of fresh air, especially because the gains in
employment were so widespread. The missing ingredient is consumer
spending. Personally I am extremely skeptical, given the nation's
changing demographics to an aging population that spends less and
saves more. However, we must keep an open mind. My heart says "no
way" but my head says "maybe...but prove it!"
Across the pond, it's pandemonium. The Greek mess
is spilling over and will have far-reaching consequences. To me, the
Greek situation creates a different concern: the global deleveraging
story of countries that massively overextended themselves during the
boom years and must now pay the piper. Earning a nickel but spending
a dime...that includes us, too!
So, another trillion-dollar bailout, a
"Euro-TARP" fund. Where does it end? Can the solution to an
over-indebted/ over-leveraged economy be more debt? At the moment,
the markets are still in total denial about the total amount of debt
in the developed economies and the ability of governments to bail
out and guarantee everything. They simply can't! It's just a matter
of time...but I want to keep an open mind so I prepare for both.
and Municipal Update: Muni-bond Buyers Beware: State tax receipts are plummeting. The
latest report shows a drop of -11.3% from 2009 and, adjusted for
inflation, state tax receipts are flat versus 10 years ago. Unfunded
liabilities such as pension and health care are going to kill them.
from income tax payments was 26% below the Governator's
projections - now 1.3b below estimates for the current year.
Sacramento County's 13 school districts don't have enough money
to pay the health benefits promised future retirees and are not
setting aside money to pay for them.
school districts have a staggering $1 billion in unfunded
retiree health benefits.
ignoring the escalating debt and are on course to bankrupt their
districts or default retirees on benefits.
Market Update: There's Danger in the Hills: The terrifying drop of last Thursday
is a not-so-simple warning of how fast the market can and will fall
once the trend changes. The suggestion that it was a trade error is
a bunch of Bologna Sandwiches! It was simply the market makers
getting out so they don't get caught like they did in 2008. Be
forewarned and prepared.
For now, the economic data is justifying the
rally, and it should continue. As mentioned above, if the numbers
continue to improve, we are in for a new bull market. However, the
increased volatility is a concern, which implies cracks in the
system are emerging. Given that such warnings often precede a top by
as little as two months, we could be looking at a July peak. My
personal feeling is that the powers that be will "try" to stretch it
out until after the election.
To participate in the upside but protect yourself
in the down, be sure to invest "tactically" - don't get greedy and
make sure you have an exit strategy.
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