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Market Update – Year starts with a bang
So far the first few days this year have been
pretty good. There are several so called indicators based on
January performance, some focusing on the first 3 days, 5
days and some on the whole month. However, I have found the
first day to be the best indicator, and this year’s triple
digit gain is a positive sign. Triple digit gains and losses
by the DJI on the first trading day of the year have not
been unusual over the past decade. I did a little research
and found that in the last ten years (2000-2009), the Dow
has a triple digit gain four times (’03, ’04, ’06 & ’09) and
a triple digit loss three times (’00, ’01 and ’08). Although
a quick start doesn’t guarantee anything, the big gains in
the DJI on the first trading day has often translated into
solid gains for the year. For those years when the DJI
started out with triple digit gains, the S&P 500 rose as
follows: ’03 up 26%, ’04 up 9%, ’06 up 13.6% and ’09 up 23%.
On the flip side, triple digit DJI losses translated into
lousy years, with the S&P 500 dropping 10.1% in ’00, 13% in
’01 and 38.5% in ’08.
For the intermediate term, there are no overt signs, as yet,
of a top, although most technical indicators are at clearly
overbought levels and a correction should be expected. My
biggest concern is with the investor sentiment readings. The
most recent American Assoc. of Individual Investors (AAII)
poll shows that 49% are bullish, a big jump from the
previous week of 37% and just 23% are bearish, the lowest
reading since Feb. ’07, just prior to a 10-day, 6% drop in
the S&P 500. Also, this week’s Barron’s mutual fund cash
flow data showed the largest flows into equity funds since
late May ’09, just prior to the June-July correction. These
sentiment readings along with the overbought readings on
short to intermediate term indicators, suggest the risks of
a correction rising. Regardless of this however, the major
trend still appears strong on a very selective basis. The
risk of another catastrophe a few months down the road
remains strong and every investor should have an exit
strategy.
Economic Update – Viagra market remains firm
As I enter my 4th decade in this business, the market is as
divided as I’ve ever seen it. Investors on both sides are so
emotionally committed to their positions that it reminds me
of the 2004 presidential election. Certainly the negatives
cannot be ignored. The increased massive federal debt
putting us in the banana republic category, rising
unemployment, worsening demographics and the fear of higher
interest rates are very scary prophecies. However, these are
not today’s problems.
For the immediate term, we have a Goldilocks
scenario. Low interest rates, massive liquidity (the fact
that it’s from the government makes no difference) and stock
market momentum. This is the great Viagra market,
with government stimulus the little blue pill, and as long
as we’re in the 4 hour period before we should call a
doctor, we can keep hope up.
For the longer term, the outlook is still very dangerous.
Bear market cycles last 17-25 years, and we are only about
half way through this. This recession is unlike any other we
have experienced since the Great Depression. Typical
recessions are inventory-adjustment recessions, caused by
businesses getting too optimistic about sales and then
having to adjust. You get temporarily higher levels of
unemployment as inventories drop, and then you get the
rebound.
This recession was caused not by too much inventory but by
too much credit and leverage in the system. And now we are
in the process of deleveraging, with the process nowhere
near complete. While the crisis stage is over (at least for
now), there is still a lot of debt to be retired on the
consumer side of the equation, and a lot of debt to be
written off on the financial-system side. Total consumer
debt is shrinking for the first time on 60 years, and the
decline shows no sign of abating. Credit card companies have
reduced available credit by $1.6 trillion dollars, and for
good reason and bank charge-offs for credit cards are going
to rise as the unemployment numbers get worse.
The world economy is resetting to a new a new world economic
order. One with lower and lower demand due to the natural
demographic shift of our aging population saving more and
spending less. This is being exacerbated by the destruction
of liquidity by the deleveraging process. In the end, no
amount of government stimulus can change that.
Investor Strategy – Play to win with less risk
Many investors continue to be plagued by confusion and
paralysis. It seems to be consensus that the market is in
for a drubbing sometime this year. Well, the fact that it is
consensus tells us that it will not happen. More importantly
however is that investors must take advantage of what the
markets give when they give it. Avoiding proper investments
because the market might get hammered is like not making
your bed in the morning because it will only get messed up
later. The key is to get very highest return with the least
amount of risk possible. My favorite phrase of be the expert
or hire one still rings true, and a good advisor’s job is to
find exceptional opportunities for their clients no matter
what the market while also providing protection and peace of
mind. In this new world economy, the survivors will prosper
greatly while the weak will suffer. This holds true for
investor and corporation alike.
In today’s difficult market environment, a Real Return
investment approach can achieve just that. Currently, there
is an above average opportunity in investing for “Real
Returns” through dividends and income. MLP’s, Preferred
stocks, REIT’s and short-term corporate bonds right now have
great yields, which give them downside protection. These are
ideal for practically every investor as well as CD buyers.
In particular, there is currently a particularly exceptional
opportunity in MLP’s, as many provide very high yields of
8-12%, most of which is tax free, capital appreciation and
downside protection. Although many are significantly higher,
they still likely have a long way to go. Selectivity is the
key.
If you would like more information on our unique proprietary
process for successfully building tax-efficient and
retirement portfolios, call or email us today for a free
consultation.
Regards -Keith
Keith Springer
President
Capital Financial Advisory Services
1383 Garden Hwy, Suite 200
Sacramento, CA 95833
www.KeithSpringer.com
Phone -916-925-8900
Fax – 916-925-8914
Providing Professional Financial Advice since 1985
"To leave the world a bit better, whether by a healthy
child, a garden patch or a redeemed social condition; to
know even one life has breathed easier because you have
lived. This is to have succeeded" -Emerson
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