But first: I had the pleasure of having a quick weekend visit back to my hometown of Boston. My sister had a new baby girl, Baleigh. A beautiful little thing. (No I don’t have pictures. I’m a guy) while I was gone, Josh’s Christian Brother’s JV team won 38-30. I really hated to miss his game, but it will be the only one this year. It’s a good time of year for Boston though as the Patriots are hot and the Red Sox are on their way to another World Series. (If you are a Yankees fan, let me now so I can take you off the list :))

Go Red Sox!

What’s Happening Now – All hands on deck for Earnings season
Earnings season kicks off with what many are calling the most important one in recent memory…all the way back to last quarter. Nobody is expecting this quarter’s #’s to be very good, so they have probably already been discounted. Alcoa’s earning’s announcement proves that, as expectations were so horrendous that a positive surprise was unavoidable barring a report that aluminum now causes some new debilitating disease. However, if we don’t start to see some top line growth (i.e. increased sales) and not just profits from cost cutting, investors will get impatient which could be the lynchpin for the end of the rally.

The real news was the report that U.S. consumers reduced their borrowing for the seventh straight month in August, as households worked to pay off debt and banks reduced credit card limits. Americans are saving more and borrowing less as widespread job losses, stagnant wages, dwindling home values and the natural demographic trends of our aging society where people naturally spend less and save more as they age, have spurred a move to what I like to call the new “mentality of Frugality” While that seems like a positive trend in the long run, it will only keep the fledgling recovery a pipe dream as consumer spending powers about 70 percent of the economy. As you see below, not only are banks not lending, there are few left who actually want to borrow that are worthy enough to lend to.

And as credit goes, so goes the consumer and thus the economy!

Economic Brief – Bear Market Rally or Echo Boom
I continue to believe that the current rally is nothing more than a bear market rally, and a tactical strategy (vs. a buy and hold/hope) is imperative. At this point I am inclined to think we are riding a horse of a different color. Bear market rallies are typically 2-3 months and as long as 6 months. Now that we are past the 6 month time frame, it appears we are in an “echo boom”. This may be a new phrase as echo booms are not widely known. Echo booms follow major booms, aka. market bubbles and/or speculative booms on rare occasions, and one of those appears to be now. These major booms are fueled by cheap money and rapid and credit growth (today’s accommodative Fed). Under normal or sane circumstances, the bust period is natural cycle of deleveraging and deflation which needs to occur, much like our need for sleep or winter for our seasons. It happens every generation and is needed for the next generation to be able to afford to live. However, the Fed is fighting this one with everything they’ve got. And even though it is creating more dire problems down the road, they are (artificially) making today seem sanguine. See my 9/11 commentary: Building another bubble…it’s a Hubba Bubba nightmare (http://keithspringer.com/weekly-commentary-091109.htm)

The reason this is important is because “Echo Booms” typically last 10 months, which would coincide with my positive short term, negative long term outlook. As you have been reading (and will below), the market looks pretty strong. However, the timing was throwing me off as rallies rarely last more than 6 months. Given my new enlightenment, the idea that the market could rally for a bit longer makes sense. Oh well, what’s in a name?

Market Update – The little engine that could
Although the long term continues to scares the bejesus out of me, I continue to be upbeat for the market in the short term. Since I turned positive in early March, the market has had an impressive “rally” or “echo boom”, what-eveh you want to call it. (My Boston accent always comes out after a visit). As I discussed last week: Investment Lesson 102: Investor Sentiment, (http://keithspringer.com/weekly-commentary-100109.htm), my biggest concern is that investor sentiment is approaching dangerous levels. Complacency will kill this rally. Yet for now, the strength has confounded almost everyone…and that’s what I like about it.

During times like this, is it critical to have an objective approach to looking at what is happening in the markets, and our Tactical approach does just that. We are all aware that periods of correction are inevitable even during the strongest uptrend and could be considered normal and healthy events. Staying on top of whats happening such as we do and deciphering whether the pullbacks are a correction or the end makes an advisor stand out. Since the market bottom in March there have been numerous pauses in the uptrend, most lasting no more than a few days. The one exception was the decline beginning on June 11th and ending on July 10th, in which the DJIA and S&P 500 fell about 7% each. Last week’s report also noted that, with the primary market advance that began in March still in its first stage, the probabilities were strongly against a decline on the magnitude of an “October Surprise.”

To put this into perspective, the DJIA dropped by 14% and the S&P 500 by 9.8% over a span of 14 trading sessions during the Oct 1997 decline. The 1989 Oct decline was slightly less severe, as the DJIA lost 8% and the S&P 500 7.3% over 4 days. The month of October did start off with a minor ‘surprise’ in the form of a 90% Down Day on Oct 1. This was the third 90% Down Day since the market’s July reaction low. The prior two, on Aug 17th and Sept 1st, occurred at the end of very short-lived pullbacks of two and three days, respectively. Therefore, last week’s pullback seems to be over and the uptrend resumed..

History shows that the key to long term success in the equity market is to stay in tune with the primary trend. Corrections may be useful to longer term investors as opportunities to cull weaker stocks from portfolios and certainly to add to the strongest positions. However, it rarely pays to trade against the primary trend. And, at present, the weight of evidence is still clearly on the side of a continuing primary uptrend. Despite the apparent anomalies in terms of a lack of expansion in Buying Power, contraction in Selling Pressure and a drop in overall volume during the early stage of the rally from the March low, we are very likely still in a strong sustained primary uptrend. With no signs of distribution currently in place, a near term correction will likely serve only to interrupt, but not end, the market’s primary move higher….but we must remain alert!

Longer Term: All this talk of a new bull market seems very ill-considered and we getting back to pre-crash growth levels will be nearly impossible considering the number of folks out of work. I understand the argument that even with 10% unemployment we still have 90% of the people working. Unfortunately it doesn’t work like that. Right now U-6 unemployment is an astounding 16.8%! (I will discuss this more next week). Unemployment will continue to rise and spending will continue to decline due to declining workers and the nation’s natural demographic shift of an aging population. Put simply, people spend less and save more as they get older, and we are turning into a nation of savers from spenders. Add the massive deleveraging to these headwinds, and it seems certain winter will be long and cold.

Portfolio Strategy – There’s gold in them thar hills
Our strategy of “Real Returns” is still the way to go, searching out dividends and income, which also provides substantial growth. I strongly favor owning individual issues vs. mutual funds wherever it makes sense. There are a great number of advantages for this (especially in regards to bond funds), such as cost, liquidity and having a definite maturity date to get your money back. High dividend stocks and corporate bonds, many with yields in excess of 10%, are still available and many (not all) are very attractive.

Warning: When this market turns it will turn hard and fast so be prepared. Investors should use this period of stability and calm to get a professional review of your finances from someone that knows what they are doing. If you would like a free 2nd opinion, just ask. That’s what we do. Our U.S. trademarked Top-Down Tactical (click - TDT™) is built for today’s volatile markets.

For more information on TDT™ and our unique proprietary process for building tax advantaged portfolios for high net worth individuals, contact us today.


Let me know if you have any questions or if I can help with something.

Cheers –Keith
916-925-8900

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Keith Springer is President of Capital Financial Advisory Services, a registered investment advisor, providing Wealth Management and Mortgage Consulting Services.  For more information on how to build and maintain a solid retirement plan, please contact Keith at
916-925-8900 or Keith@KeithSpringer.com