I always try to give investors some common sense analogies and conceptual ideas to get my point across. Why? Because no one likes to watch a techno geek pointing to lines on a chart, or sit and watch a financial commentator prognosticate what the next Fed move will be. To the average investor lines and squiggles mean very little, and commentary of what the Fed will or will not do border on a waste of time. While lines and squiggles may make sense for a few minutes, so do tarot cards from a fortune teller.
Unfortunately, most investors REACT to the "Surface Anatomy" of the markets, and fail to see the big picture of what痴 really going on.
"Surface Anatomy" is used in medicine, and is a "study of the configuration of the surface of the body" in an attempt to figure out what is going on with the internal parts.
Investors often use "Surface Anatomy" when dealing with the markets by reacting to the hot news item of the day, or the latest economic report. This can be a very dangerous strategy, and one that has proven to successfully pick-pocket investors through the years.
So, why do so many investors listen and respond to Surface Anatomy?
1) They don't have the time to accumulate all of the facts before making an investment decision.
2) They are impatient, and always feel like they must be doing something.
3) They approach investing with a gamblers mindset instead of the mindset of a prudent investor.
As Jim Rogers once told me; "Investors always feel like they must be doing something. They just can't sit still and wait"
Here are some facts;
1) Outsourcing of American jobs has helped to create a $800 billion US trade/current account deficit.
2) The majority of the new jobs created are in domestic services (IE-waitresses, bartenders, education, health care, etc), and not in manufacturing and export related sectors.
3) From January 2001 to January 2006 the US economy lost 2.9 million manufacturing jobs. According to the Bureau of Labor Statistics, US employment of engineers and architects declined by 189,940 between November 2000 and November 2004.
4) Our trade/current account deficit has lead to the decline in the dollar. Products once made (formerly exports) in the U.S. are now imports.
5) Pundits argue that corporate profits are still high, but they fail to mention the reason. U.S corporations produce goods and services with cheap labor overseas (once American jobs), and then turnaround and market these products to Americans. With the loss of 2.9 million manufacturing jobs, these products must remain cheap to make up for the decline in wages that resulted in the higher paying jobs that were lost.
Morgan Stanley's chief economist, Stephen Roach said;
"Under unrelenting pressure to cut costs, American companies are now replacing high-wage workers here with like-quality, low-wage workers abroad."- Read Article
6) Inflation continues to be a serious problem. Of course there is no inflation in products made from cheap labor markets. But we cannot fill up our vehicles or live in homes made from tee-shirts produced in China and India.
Commodity prices have been falling in recent weeks, but Crude remains around $70/bbl, Unleaded Gasoline is around $2.00, Gold has corrected to $580/oz, the CRB index is up 2.2% ytd, and the Goldman Sachs Commodities Index (GSCI) is up over 8% ytd.
Many oil drillers are postponing new projects because of soaring costs for drilling rigs, and the raw materials that make up rigs and drilling bits.
7) The Real Estate market is beginning to slow. The June 19, 2006 release of the Housing Market Index (HMI) declined to 42, the lowest mark since April 1995. A number of publicly traded homebuilders have lowered their earnings estimates for 2006. In some hot real estate markets (Florida, California, Arizona and Nevada) speculators have accounted for about 10-25% of sales.
8) The Cheap Money era is coming to an end. Like with most real estate manias, consumers try and out smart interest rates by choosing 訴nterest-only� and "adjustable rate" mortgages. Of course, they guessed wrong (again). The largest jump in interest rates has been on the short end and these once 4% loans have jumped up to prime which is around 7.5%-8.0%. Ouch.
I think your beginning to understand our concerns.
The sell-off over the past 4 weeks should serve as a warning shot across the bow. Like in March 2000, the NASDAQ began a severe correction that took the index down from a high of 5047, to a short term low of 3163 by May 23rd. This was a loss of 1884 points, or 37% in a little over 2 months. By July 2000, the NASDAQ gained back 1126 points, but failed to reach its March 2000 high.
While we do not believe we will see a decline of the same magnitude in the major market indexes as we did the NASDAQ in 2000, but we do believe the S&P can retrace half of its 70+% gains from the lows in 2002. We believe the market will attempt to rally in the weeks ahead, but may fall short of reaching its highs for the year.
Our best guess is we may see a correction of 15-20% after a modest recovery this summer. So, while on the "surface" everything may look fine, it痴 the internal parts that concern us.
