February 9, 2010
Contact: Gayle Lynn Falkenthal, APR
619-997-2495 or firstname.lastname@example.org
Dawn for Those Who Stand Long
By Herb Morgan, President & CEO, Efficient Market Advisors
As published in Forbes.com February 9, 2010
With the S&P 500 down 7.6% from the peak of January 19th and just over 4% for 2010, the question on investor’s minds is:
Is this a correction in the recovery or another major leg down?
This pullback is not unexpected given the meteoric ascent of stock prices since the March of last year. In fact, this is the third pullback since the bull market began. Last June saw a 6.9% drop in the S&P500 and we had a similar 5.6% pullback in October.
On January 10th of this year the Investment Committee at Efficient Market Advisors approved some modest changes to the asset allocation of our portfolios which included reductions in our weightings to International Equities (EFA), Real Estate Investment Trusts (ICF) and Domestic Equities (IWM, IJH, SPY).
In addition to lowering our target weights, we also rebalanced portfolios, as most accounts had grown to be overweight in these asset classes.
Finally, we added a new position, The I-Shares Diversified Alternatives Trust (ALT) an asset that we expect will add diversification and non-correlation benefits to your portfolios.
Reading the economic releases is more valuable than reading the stories about the releases
Over the years I have also noticed that, more often than not, a reporter's interpretation of economic data is inconsistent with that of EMA's investment committee. When I read or listen to much commentary, it seems to come generally with a perpetual negative bias. In highly political times it’s easy and dangerous to see the economic landscape with glasses clouded by personal political bias.
Don't get me wrong, there are some serious problems out there
The issue of US federal debt as a percentage of GDP, and the very real threat of higher interest rates on that debt are scary. The US must get its fiscal house in order and the President Obama’s proposed budget does not go nearly far enough in this regard.
Unemployment looms heavy on the consumer, who is no doubt needed to help the economy expand. And finally, lending needs to increase to re-flate asset prices.
But there are always "things" or reasons to be scared out of equities. Today’s debt concerns are not unique. There was a four year period during WWII where US debt to GDP was several times what it is today, yet we survived. My point is that while the massive fiscal stimulus is both wasteful and harmful, I don't think it is wasteful or harmful enough to sink the world’s largest economy.
Taking the negatives into consideration and weighing them against the positives still suggests the recovery and job creation are on track
The list of economic reports that are more positive than negative:
• Auto sales are rebounding strongly and holding even after Cash for Clunkers
• Building permits have risen slightly from the bottom last March
• Business spending is up and inventory rebuilding has begun
• Capacity utilization is up from 68 to 72, still low but up
• Consumer balance sheets have improved, but we still need jobs
• Continuing claims for unemployment have come down from 6.8mm to 4.6mm, though some of these have moved to extended benefits
• Inflation is non existent, but lurks
• Chicago manufacturing activity is the highest since May 2007
• Durable goods orders are showing strong recovery
• New York manufacturing has risen four straight months
• Exising home sales have surged from a 4.5mm rate to a 5.5mm rate, though more foreclosures are an issue
• Factory Orders have risen eight of the last ten months
• Home prices have risen eight of the last ten months
• Fourth quarter GDP grew at a 5.7% annualized pace
• Housing starts have not recovered but must to complete the recovery
• Industrial Production is up six straight months
• Weekly claims for unemployment are down from 680,000 per week this time last year to 470,000 now. (430,000 or lower signals new job growth)
• The service sector is expanding
• The manufacturing sector is significantly expanding
• Philadelphia manufacturing has expanded for six straight months
• Business spending on technology is booming
The number one and two index performers for the year are I Shares US Select Regional Banks Index (IAT) +4.85% and I Shares US Select Home Construction Index (ITB) +3.63%. It’s hard to imagine these two leading the way if this recovery were not “real”
Stay long my friends.
Herb Morgan is president and chief investment officer of Efficient Market Advisors, LLC, an ETF separate account manger serving financial advisors and their clients. His weekly podcast is available free on iTunesContact Herb via e-mail: email@example.com, and @hmorgan422 on Twitter