Summer in Alberta is very short, and this edition of Views from the Crow’s Nest will also be shorter than usual. Given the changing market conditions, we may also publish before our next regularly scheduled date of October 15th.
We humans love certainty and hate the opposite. That’s why we work so hard to discern the future: to gain a degree of certainty and the feelings of security and control that follow. The smarter and more powerful you are, the more frustrating uncertainty is. Given that, imagine how difficult it must have been for Fedhead Ben Bernanke – arguably the most powerful public figure in the world – to admit to everyone a fortnight ago that the future is “unusually uncertain.” Do I smell scorched ego? Obviously, the future has always been uncertain and always will be, but in the words of Yogi Berra,”The future ain’t what it used to be.” We will speak to this concept in future communications.
It’s been said that those who fail to learn the lessons of history are doomed to repeat them. The central planners to the south appear poised to wash, rinse, and repeat. While beleaguered governments in Europe shuffle toward “austerity light,” the rulers of the crumbling American empire are preparing to put out the fire that is consuming their once-great nation...with more flammable liquids! The first round of massive injections of newly created currency issued by the Federal Reserve (Quantitative Easing 1) didn’t work very well (some would argue not at all), but since interest rates are basically zero and the economy is stalling, the Fed is putting the finishing touches on their “QE-2” strategy, based on their belief that this will reverse the short-term deflationary trend we’re experiencing.
Now we’re approaching U.S. mid-term elections. On the one hand you have the Democrats’ platform of Keynesian socialist central planning, and on the back of the same hand you have the Republican establishment promoting its “light” version of same. Both sides will blame each other for the current economic malaise and argue childishly about which party deserves the right to control Congress and dole out money to voters. This money is yet to be borrowed from foreign nations whose citizens still make things for a living. No one has the courage to propose an agenda of genuinely effective measures to fix the real problem –addiction to over-spending at every level of government- lest they don’t get elected. Wash, rinse, repeat!
In our last newsletter –published one week early on June 8th – we expressed our view that the next phase of the downturn would begin 3 to 8 weeks later (June 29th to August 3rd), following a rally fuelled by very robust earnings, particularly in the U.S. Looking back now, it appears we had a short-term double top on the S&P 500 on August 4th (1,127.24) and August 9th (1,127.79). We had ventured the opinion that we might start to slowly track lower with lower summer volumes and disappointing economic data releases. With the release of the Fed’s latest deliberations last week the markets started to sell off. As of Friday August 13th the S&P 500 sits at 1,079, about 4.4% below August 4th and 9th. So far, things are playing out more or less as we had anticipated, though we were surprised that the earnings-driven rally didn’t push another 5 to 8% higher.
Right now the markets seem to be dominated by two main factors: confusion and apathy. Economic data points are confirming the suspected weakening of the soft recovery. While moderating their rosy forecasts, the Bulls are still denying a double dip recession scenario. The Bears appear both surprised and disappointed that the data points aren’t worse. It would seem that many investors are in a holding pattern awaiting clues for a tipping point of any kind.
We’ll have to wait and see if the downside acceleration we’re anticipating over the next two months actually materializes. The conditions in the U.S. are still in place for this to happen, including: slowing GDP growth (with significant downward revisions of early estimates), stubbornly high unemployment (9.5%) and under-employment (>16%), the ECRI’s Weekly Leading Index is into dangerous territory (it dropped as low as -10.8 and is currently at -9.8), anaemic existing home sales, a continued contraction of household balance sheets, and the recent bail-out of many states. Germany’s export sector recently jumped with the depressed Euro, but the rest of Europe was more or less flat in July and they’re now mostly on vacation. We’re also starting to hear more about cracks in the Great Wall of China’s emerging economy, which is bad news since the industrialized world seems to be depending on them. The outlook for 2011 and 2012 is not rosy at all, which we expect to start getting priced into markets this fall.
When risk appears high, caution is the most prudent course of action. In that light, our clients’ portfolios have been shifted largely to cash and short term bonds (+/- 80%) over the last few weeks. When other asset classes are declining, cash is in a Bull Market. Our portfolio managers continue to look for a low of 950 before year end, about 13.5% below current levels, but there could be several short-term rallies before we drop there. If the 950 support level doesn’t hold, the next meaningful technical support is at 880 or 22.6% lower than now.
Though some of history’s most notable major market events have occurred in October, September is -on average- the worst calendar month for equity markets. The upcoming mid-term election campaigns promise to be pretty nasty and this could be enough to tip America’s very fragile Mass Psychology downward...along with equity markets. We are well prepared by being very conservatively positioned. When things look very pessimistic to the masses and the mainstream media is reporting how bad everything is, our managers will nimbly re-enter various positions. A falling market is only bad for you if you’re fully invested while it’s falling, and significant opportunities arise for those who have been waiting on the sidelines. Fear and Greed are destructive. Patience and Discipline win every time.
That's all for this issue of Views from the Crow's Nest. Please forward this newsletter to anyone you think might benefit from the information.
If you're not already a member of our Client Family and are curious about how we might be able to serve your family, please call us at 403-517-2234 or click here: andrew@integratedwealthmanagement.ca
Cheers,
Andrew H. Ruhland, CFP, CSA
Wealth Management Advisor
President, Integrated Wealth Management Inc.
